Purchase Order Funding - A Blog about PO Financing

Finding the Right Vendor - How it Affects Your Financing

2012-01-15T22:17:00.003-05:00

The WSJ recently published an article about the importance of finding the right vendor for your business. This is pretty critical for companies that are looking to use purchase order financing to fund their orders.

To have a successful po financing transaction you need four ingredients that need to work in concert with each other:

An order that can be financed
A customer that is credit worthy
A reliable vendor
High enough profit margins to support purchase order financing costs

As you can see, having the right vendor for your business is critical to the success of the transaction (for obvious reasons). However, many start up businesses ignore this key requirement. Many times, the prospective client will find their vendor on the Internet and do only a minimal amount of due diligence. Very often willing to trust a key business transaction on the reliability of someone they know very little about. They are often surprised when they find out that we do perform detailed due diligence.... any many are even more surprised when we inform them of critical deficiencies that we find of their selected vendor.

When we review a vendor we will try and determine if they:

Have a good track record of product delivery
Have a good financial record
Have any legal or tax problems

You should not leave it up to your purchase order financing company to do this research for you though. Because if they find issues with your selected vendor they will start questioning the reliability the rest of the transaction, especially if the supplier had some flagrant problems. More often than not, the funding company will shy away from the transaction(or the client all together!)

At the very least, companies should consider doing the following due diligence:

Get a detailed business credit report (i.e. Dunn & Bradstreet)
Do a public records search to look for legal problems
As for references

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Looking for factoring or purchase order financing? Consider working with us!

Why We Can't Finance Your Supplier

2011-12-07T18:19:00.001-05:00

Every so often, we speak to customers that need purchase order financing because their supplier is unable to give them terms. Notice that I didn't say unwilling - I said unable. Usually the supplier has had some cash flow problems of their own and are asking for full payment before being able to produce the goods. They ask for the advance payment because they need it to pay for their own raw materials and labor. IN effect, they are asking their client to finance them.

Unfortunately, if a client of ours was buying from the above mentioned supplier, we would not be able to finance the order. And personally, I don't think that any business financing company that offers PO financing would be able to fund this order either.

Why? For one simple reason. Purchase order financing is a tool that wholesalers can use to guarantee a payment to their suppliers who are not willing to give them payment terms. However, it is not a tool that is used to finance your suppliers that have cash flow problems. Think about it this way, if a purchase order financing company prepaid that supplier so that they could manufacture the goods, it would be as if they were giving them an unsecured loan. Why would a purchase order financing company do that? PO financing companies are in the business of financing their clients - not their client's suppliers. If the supplier needs business financing - they should look for it themselves!

Most purchase order financing companies protect themselves (and their clients) and minimize supplier problems by insisting to pay suppliers by letter of credit or a similar instrument. This protects all parties in the transaction. However, if your supplier has cash flow problems, it's unlikely that they will accept this type of an agreement.

Financing Commodity Transactions with Purchase Order Financing

2011-11-15T10:54:00.001-05:00

Every so often we get an inquiry from a company that wants to use purchase order financing to fund a commodities transaction. Unfortunately, I have never seen a single transaction succeed. At the surface, purchase order financing would seem like an ideal solution to finance a commodities transaction. But once you look at the details, transactions always fall through.

By the way, I am not saying that purchase order financing has never been used to finance a commodities transaction..... I am just saying that I have never seen one done and I have been at this for a decade. Here are some reasons why these transactions fail:

Gross Margins: Most PO financing companies will only work with transactions that have minimum gross margins of 20%. In fact, many prefer to see 30% gross margins. Having high margins offers some protection to the business financing company if there are any problems with the transaction. For example, if some product if damaged during transport, a high margin transaction will be less impacted than a low margin transaction.

Also - and this is very important - finance companies prefer to work with high margin transactions because purchase order financing is expensive. There are no two ways about it - PO funding costs more than conventional funding. Working with high margin transactions helps ensure that clients still have plenty of profit left after financing costs.

First Timers/Novices: The commodities field is full of startups that have high hopes but little transaction experience. Many of these companies have unrealistic expectations about their transactions. For example, many will claim they can sell oil or coffee at 30% gross margins if they could get the funding. Unfortunately, that is not believable. Commodities tend to sell for single digit margins. PO financing companies prefer to steer clear of these types of transactions.

Questionable Suppliers: Many novices also tend to work with what I will call "questionable suppliers" that are located in far flung places of the world. Usually these suppliers offer products at "very cheap prices" but also have questionable demands. For example, this type of supplier may be able to sell product at a substantial discount but demands prepayment of the full amount by wire transfer and will not accept a third party product inspection. Many novices tend to want to work with these suppliers ,which again scares of funding companies.

MT1099 (Proof of Funds): Most po financing companies will not get involved in a transaction where the supplier demands proof of funds (e.g. MT1099). Most purchase order finance companies will not provide an MT099 to your supplier. Contrary to popular belief, MT1099's can be misused so many po financing companies steer clear from them. Most PO financing companies will be happy to pay your supplier with a letter of credit that is contingent on an inspection from a third party company. If you think about it, showing a letter of credit should be proof enough that funds are there.

On a similar subject, factoring won't be able to help many commodity trading companies either for the exact same reasons.

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Why Do Purchase Order Financing Applications Ask For So Much Information?

2011-11-07T17:59:00.002-05:00

This is a common question that we get from prospects looking for purchase order financing - Why do purchase order financing companies need to ask for all these documents before funding an opportunity? Some include:

Income statement
Balance Sheet
A/R Aging Report
Copies of the purchase order
Other information

Simple - because they want to be certain they don't lose their money. Although many people have the notion that a purchase order financing transaction is almost "risk free", this is not accurate. Actually, PO financing transactions can be quite risky for the company. This is why they ask for this information. The company wants to make sure that:

Your company has some track record selling this product successfully
Your company is in stable financial shape
That your customers and suppliers are solid
That your invoices are free of liens or encumbrances

This is where all the information that the purchase order financing requests comes in. They use it to determine the risk level of the transaction.

Also, I'd like to mention a few things that can go wrong with a purchase order funding transaction - if only to prove they are not risk free:

Your supplier can deliver faulty goods and not correct the problem (supplier risk)
You could deliver the product and have a customer that refuses to pay (credit risk)
Your goods could meet the specifications but the client could still claim the goods are not satisfactory (disputes)
There could be a mismatch between your customer requirements and the requirements that you gave your supplier (operational risk)
The transaction could go well but a previous lien holder (i.e. tax lien holder, judgement lien holder) that has a higher position lien than the po financing company (asset security risk)
And more!

All of these could go wrong and you would have a situation where the purchase order financing has already paid for the goods, but with a minimal chance that the transaction will conclude sucesfully. This is also why purchase order financing rates are higher than factoring rates - the risk is higher.

Are Suppliers Guarantees Useful?

2011-09-01T12:21:00.000-04:00

Supplier Guarantee

The sort answer is - yes - provided your supplier is willing to work within the terms of the guarantee. We have covered supplier guarantees (also known as vendor guarantees) in a previous post. But in summary, in a supplier guarantee the factoring company agrees to pay your suppliers our of the factoring proceeds. This gives your supplier the assurance that they will get paid before you do. But, only if the order creates a factorable invoice that is funded.

There are two advantages to the supplier. First, since the factoring company pays the supplier, the vendor guarantee reduces the concern that the vendor may have about your company's credit. Second, it allows the supplier to sell additional goods to your company.

However, using this type of an arrangement is not without risks to the supplier. There are two common risks. First, your company could fail to deliver the order. This can happen and it means there is no invoice to factor and thus no payment. Or second, your company could chose NOT to use invoice factoring for that particular invoice. Remember, the factoring company only pays the supplier out of factoring proceeds. Obviously there are other risks - but these are the two that most suppliers focus on.

For a supplier guarantee to be useful to your company, you need to convince your supplier that your company can deliver on the order AND that the invoice will be factored. Said simply, you need to prove that you are a safe risk. In my experience, supplier guarantees work best when you already have credit (and therefore trust!) from your supplier but have an increase in orders that exceeds the credit that your supplier is willing to provide. But when used appropriately, and with the right factoring company, they can help your company grow.

Government Contractors May See Tough Times Ahead

2011-08-12T12:50:00.000-04:00

The US Government has a number of programs that are designed to help small businesses sell to the government itself. These are great because the US Government is a great customer, a steady payer and more importantly, a customer that buys goods and services even during recessions. On the other hand, we have all seen the recent debt ceiling discussions that emphasized that government must cut back their expenditures. This may be a tough awakening for many entrepreneurs. Here is a link to the WSJ article about government belt tightening.

How much of this will affect small businesses - that's hard to say. However, one has to keep in mind that small business grow is needed if the economy is to start adding jobs. Recent small business optimism numbers are not very encouraging so my personal belief is that - if possible - government should minimize any changes to the small business programs.

Many purchase order financing companies do business with government contractors. Obviously, they stand to feel a squeeze in their revenues if the government reduces their help programs to small government contractors. This may also affect conventional factoring companies because many of them offer factoring to government contractors. It's hard to say how it will play out.

Small Businesses Are Depressed

2011-08-12T11:45:00.000-04:00

The Small Business Optimism Index is going down - and that's not good. Small businesses are one of the engines of economic recovery and without them any employment recovery will likely stall and spiral down. Small businesses are of strategic importance and therefore the government should promote conditions where they can succeed - or at least have a go at trying to succeed.

Some experts say the problem is lack of sales not lack of funding. Other experts say it's lack of funding, not lack of sales. Personally, I think it's a little bit of both. There is a problem with sales demand but also a problem of access to capital and business financing. Stimulating demand/sales is a politically charged subject - so I will avoid it. However, most would agree that appropriate access to properly (risk adjusted) priced business financing would help the situation. And at this point in the economic cycle - this is not happening.

We see this all the time on the purchase order financing side of our business. We have noticed that there is an influx of prospects that have good financials and should qualify for bank financing - but they aren't. They are being declined by banks. They come to us because we are their "Plan B". The problem is that Plan B is more expensive that conventional bank financing so these companies are seeing increased financing costs - which drags down profits. I think this is a problem of our current economic environment that needs to be addressed.

Small Business Lending Increasing - And An Interesting Caveat.

2011-05-02T15:51:00.000-04:00

It seems that today is the day for good news. In my other blog, I posted about the increase in construction activity and how manufacturing is in positive territory. Now, for more good news, small business lending is up. You can read about it here.

The interesting caveat, about half the companies looking for business financing went with smaller or mid sized banks (instead of a big bank). We have actually seen this happen in our business as well. About six months ago we noted that we were loosing some invoice factoring and purchase order financing prospects to banks. But not to large banks. With few exceptions, we lost it to small or medium sized mid west banks which seemed to have escaped the real estate mistakes of their bigger rivals.

An increase in conventional lending is good for the economy as a whole. In my view, purchase order financing has it's place in the business funding ecosystem. It's a solution that is used by small and mid sized companies that have a large order that can't be financed through conventional means - usually because the company has limited credit history or limited experience. In other words, it's more expensive than conventional funding. However, during the credit crunch, banks started turning companies away simple because they had no money to lend. This forced companies with good credit profiles to seek alternative funding as a last resort. Since products like factoring and purchase order financing are more expensive than conventional loans, companies saw their funding costs increase.

It seems that slowly (but surely?) we are heading towards a normal environment, where companies with solid credit profiles will be able to secure conventional bank financing at appropriate rates. I sure hope this happens fast - the economy needs it!

Vendor Guarantees - An Alternative to PO Financing

2011-04-21T16:02:00.001-04:00

Although purchase order financing is usually much easier to obtain than conventional bank financing it's not as easy to get as factoring. Most po financing transactions carry more risk than factoring transactions so that qualification requirements tend to be more stringent. Also, since purchase order financing transactions are considered riskier, they carry a higher cost.

However, there is an often overlooked alternative called vendor guarantees. Many times, vendor guarantees can be used in place of po financing. And, these can easily be integrated into most invoice factoring programs and have similar pricing.

How do vendor guarantees work? This is easier if explained by an example. Let's first look at a conventional invoice factoring transaction:

You deliver the goods to your customer
You send the invoice to the factoring company
The factoring company advances you 80% of the invoice
You get the remainder 20%, less a fee, once the customer pays in full

In a vendor guaranty situation, the factoring company agrees to pay your supplier out of factoring proceeds before paying you. Your company, the factoring company and your vendor/supplier sign a three party agreement that allows the factoring company to pay your supplier before paying you.

A vendor guarantee can be used to get higher (or better) credit terms from your vendors because a financial intermediary is involved. The transaction would works as follows:

You deliver the goods to your customer
You send the invoice to the factoring company
The factoring company advances your vendor funds to cover their invoice (up to 80% of your invoice). Any difference is remitted to you.
You get the remainder 20%, less a fee, once the customer pays in full

Why would a vendor accept this type of arrangement? They would because they know that the payment is coming from the factoring company. However, and this is very important, the factoring company will only forward a payment to your vendor if you factor the invoice and only up to 80% of the invoice (this varies).

Many times, a vendor guarantee can be used instead of purchase order financing, making this solution something you should consider.

This short article is only a summary of how vendor guarantees work. One word of advice, be sure to use an attorney to help you understand them and their ramifications.

Disclaimer: This post is for information purposes only. Please consult an advisor if you require financial/legal advice.

Combining Factoring and Purchase Order Financing

2011-04-12T11:48:00.001-04:00

In my last post, I wrote about the benefits of combining factoring and purchase order financing. Generally, combining both products yields a lower total cost. To some, this sounds counterintuitive so today I'd like to expand on that by giving one example with numbers, which will help readers understand this.

Transaction Assumptions
Let's assume that Reseller Inc is buying widgets from China and selling them to a Big Box retailer in the USA. Let's assume that Big Box issued a po for $100 to Reseller Inc. Reseller Inc will need to pay his supplier $70 for the the goods (making the Gross Margin 30% - $30/$100 * 100). Let's assume it takes 30 days to manufacture the goods in China and bring them to the US. Likewise, it takes Big Box 30 days to pay the invoice in full.

The purchase order financing plan advances 70% of the $100 Big Box PO and charges 3% for every 30 days. The factoring plan charges 2% and advances up to 80% of the gross invoice.

Using PO financing + Factoring:
1. On day 1, the PO financing company writes an payment covering the $70 cost of goods to supplier
2. On day 30 the goods are delivered to Big Box along with an invoice for $100
3. On Day 30, the invoice is sold to the factoring company.
4. The factoring company advances 80% of the invoice (or $80), split as follows.
   a) $72.10 to the po financing company ($70 + $2.10 fee. The $2.10 comes from $70 * 3%)
   b) $7.90 to the client
   c) Note that $72.9 + $7.90 = the $80 dollar factoring advance
5. On day 59, Big Box pays $100
6. The factoring company settles the transaction as follows:
   a) $80 to the factoring company (recoup their $80 advance)
   b) $2 fee to the factoring company ($100 * 2%)
   c) $18 is given to the client

Total fees for this transaction are of $2.10 for po + $2 for factoring = $4.10. The client got $7.9 from the factoring advance on day 30 and $18 at factoring settlement for a total of $25.9.

Using PO financing alone:

1. On day 1, the PO financing company writes an L/C covering the $70 cost of goods

2. On day 30 the goods are delivered to Big Box along with an invoice for $100

3. On day 59, Big Box pays $100

6. The po financing company settles the transaction as follows:

a) $70 to the po financing company (recoup their $70 supplier payment)

b) $4.2 fee to the po financing company ($70 * 6%)

c) $25.8 is given to the client

The client gets $25.8 on day 59 at settlement.

One thing that usually confuses people is that invoice factoring plans and po financing plans are charged differently. The purchase order financing fee is based on the funds paid to the supplier, in this case the $70. The factoring fees are based on the gross invoice of $100 and NOT on the factoring advance of $80.

Selling More Without Going Broke

2011-04-11T18:26:00.001-04:00

Most product resellers think that getting a large order, or a number of large orders, is the best thing that can happen to their business. In reality, it's only a good thing if you have the capital or business financing to fulfill the order. If you don't, it can quickly turn into a nightmare.

Let's look at a typical example scenario. Johnson Products Supplies imports widgets from China and sells them to big box retailers in the US and Canada. His Chinese suppliers demand prepayments, or payment by letter of credit. His clients pay invoices in 30 to 60 days. For any order, Johnson products needs to pay the supplier, wait 30 days for the goods to reach the US and then wait an additional 30 to 60 days to get paid. In total, the the transaction may last 60 to 90 days. It will take that long before Johnson Products sees any money out of the transaction.

In the meantime, the company needs to pay employees and other expenses associated with the business. It's easy to see how without a large capital cushion, the company could run into problems. Depending on the size of their cash cushion, a few large orders could decimate savings, forcing the owners to delay critical payments (or orders) until current invoices get paid.

One way to solve this problem is to use business financing to cover supplier payments. One alternative solution is to use purchase order financing. PO funding is a specialized tool that can be used by resellers. It covers your supplier costs, enabling to fulfill large orders without having to worry about how to pay your suppliers. That transaction is then settled when the customers pay for the goods.

In many instances, combining factoring and purchase order financing may help a company achieve lower financing costs. These combined transactions are usually structured as follows:

The purchase order financing company pays your supplier
The supplier delivers the goods to your client
Once the goods are accepted, you invoice your client
You factor the invoice. The factoring company pays off the purchase order financing company
Once the end customer pays for the goods, the transaction is settled with the factoring company

Although combining factoring and purchase order financing can add some minor complexity to the transaction, it can usually decrease the total cost. This is because (on average) the cost per dollar of po funding is higher than the cost per dollar of factoring. PO funding is more expensive than factoring for a simple reason: financing a purchase order (a promise to buy) has higher risk than financing an invoice (a promise to pay).

Why a Purchase Order Financing Company will NOT pay your Suppliers in Cash

2011-02-23T11:49:00.000-05:00

One common request we get from purchase order finance clients is to pay their suppliers in cash, rather than by letter of credit. While po financing companies can pay suppliers in cash (or wire) after the goods have been shipped and inspected, most will not prepay for the goods in cash.

Why? Simple, an advance cash payment to a supplier is the equivalent of giving them an unsecured loan.

Let me give you an example. Let's say that ABC Importers if buying widgets from a supplier in another country. Let's say that the supplier is demanding either a deposit or a full payment of the goods paid by wire (TT) prior to the start of manufacturing. There are usually two reasons why they may be making this request:

a) They don't trust you
b) They need the money to be able to fulfill their order

If their issue is a), lack of trust, then that can easily be solved with a properly executed letter of credit. In my experience, the reason most suppliers ask for cash is because they really need it. If you (or the purchase order financing company) pays them, you are giving them an unsecured loan (or use of your cash). Now, what happens if they default in your order, provide unacceptable product or just go bankrupt? How do you get your cash back?... The short answer is that you don't.

As a rule of thumb:

a) Most po financing companies will not prepay your foreign suppliers by wire (in cash)
b) Some po financing companies may do a "cash against shipping docs" arrangement for foreign deals
c) Some po financing companies MAY prepay your US suppliers if they are large and credit worthy (think Dell or GE).

Some companies just don't like dealing with letters of credit, mostly because they require some additional work on part of the parties that want to do the transaction. In our view, the extra work is well worth the protection that a properly worded letter of credit (usually in conjunction with an inspection of goods clause), can provide you.

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Looking for information on purchase order financing? Read the purchase order finance blog

Why PO Financing does NOT work for commodities transactions

2011-02-22T11:46:00.002-05:00

Lately, I have seen an increase in the number of prospects looking to use purchase order financing to fund a commodities transaction. Unfortunately, these transactions seldom work. The pain reason why they don't work is that commodities usually sell for low margins - 5% to 10%. Purchase order financing only works for transactions where are margins are 20% and above. This ensures there is an adequate margin of safety if things don't go as planned.

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Looking for information on purchase order financing? Read the purchase order finance blog

Purchase Order Financing and Manufacturing (Debunking Myths)

2011-01-11T14:28:00.000-05:00

One of the disappointing aspects of purchase order financing is that it can't be used by most manufacturing companies. This saddens me a bit because I am a big believer that manufacturing should be play a big role in our economy and would like to help with that.

Most people believe that purchase order financing works as follows: a finance company advances funds against the po, which enables the client to buy supplies, manufacture goods and fulfill the order. Unfortunately, this concept is not 100% accurate. Not even close.

First, let's debunk some myths:

1. The PO finance company will advance me a % of the po: Not true. The po finance company will only pay your product supplier directly.

2. I can use PO financing to cover payroll and other manufacturing costs: Not true. See #1.

3. I can use PO financing to buy supplies - then use to make a product: Not likely. See #2.

So, if a po financing company will not do #1, #2 and #3 - what DO they do?

The Typical PO Financing Client
Let's start with the typical client. A PO financing company will only work with a product re-seller or a manufacturing company that sources their product out to a 3rd party. The common denominator is that the only companies that qualify are those that buy the product from someone else. This is done to eliminate so called "manufacturing risk" and will be clear in the next section.

Common Transaction Structure
The structure of a transaction is relatively simple. It works as follows:

1. You get an order from a client
2. You then place an order with your supplier
3. The funding company pays your supplier. But payment is either done:
   a) By letter of credit payable once goods are verified to meet requirements
   b) Cash against shipping documents with verification - a variant of a)
   c) Prepaid, if the supplier is a large reputable company (i.e. a member of the S&P 500)
4. Supplier ships goods
5. Goods are delivered to end customer
6. End customer pays for goods - transaction is settled

Manufacturing risk is reduced drastically by making sure that the company only pays for goods that conform to what the customer needs - and verified by a 3rd party. Obviously if something goes wrong in the manufacturing or production process, the supplier can't collect and the risk is minimized.

Why is manufacturing risk so scary?
Imagine a scenario where the finance company pays your vendors, who then ship supplies to your company. Your company then begins the manufacturing process - but for some reason - something goes wrong the the product you make does not meet your customers requirements. Your customer refuses to take the goods and the transaction falls through. Now what....? Remember that the financing company has already paid your suppliers and you needed that sale to be able to pay the financing company back. Suddenly you have a big mess and unfortunately it becomes your problem to solve. Not a good situation to be in...for either party. Let's keep in mind that most companies that look for purchase order financing don't have substantial assets - otherwise hey'd go to a bank.

I get it! So purchase order financing is risk free for the finance company (at my expense!)?
Not even close. It's easy to think that, but even without manufacturing risk, things do go wrong.... more often that you'd think. There is substantial risk in the transaction. However, by reducing/eliminating manufacturing risk, the purchase order financing company can make the risk manageable to them.

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Looking for information on purchase order financing? Read the purchase order finance blog

Can Purchase Order Financing Be Combined with Other Types of Funding?

2010-12-14T14:58:00.002-05:00

In a recent post, I talked about combining purchase order financing with factoring from a cost perspective. Now, I'd like to broach the subject from a different perspective. Here are two scenarios:

1. Company A: They have a line of credit based on accounts receivable (similar to factoring). The line of credit has a UCC Lien that encumbers all assets, including receivables.

2. Company B: They have no financing whatsoever. Assets are unencumbered.

Assume that both companies are good candidates for purchase order financing. Could they both get it? Well, Company B could get it for sure. Company A's situation is a little bit trickier because they have their invoices/receivables encumbered by a UCC.

Think about it this way - the collateral for a purchase order financing transaction is the invoice that is generated when the goods are delivered. In Company A's situation, that invoice is already collateral for an existing loan, leaving the purchase order finance company (who paid for the goods) in a bad collateral position.

There is a solution to this problem though. The purchase order financing company and the bank that offers the line of credit could enter into an inter-creditor agreement, where the purchase order financing line would be taken out by the line of credit as soon as an invoice is generated. This allows both funding lines to co-exist while being reasonably collateralized. These can be tough to negotiate but can be done. On a tricky subject like this one, is best to consult a legal or financial advisor.

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Looking for information on business funding? Read the purchase order finance blog

Should you Combine Purchase Order Financing with Factoring

2010-11-05T12:16:00.002-04:00

One of the most common sales pitches that factoring and purchase order financing companies use is to say that combining factoring and purchase order financing is cheaper - because you are refinancing an expensive transaction (po financing) with a less expensive one (factoring)

In general, this holds true. But like everything, the devil is in the details. Here is one important detail. Combining po financing and factoring, when margins allow, will be cheaper from a TOTAL TRANSACTION COST perspective if:

1. You can only factor enough of the invoice to close the po funding line. This means that in large margin transactions, you factor a partial invoice.

2. The rate differential between factoring and purchase order financing is such that the cost per dollar is cheaper for factoring. This is not always true!

Note that I am talking from a total cost perspective, not a cost per dollar perspective.

This graph shows two transactions at different Gross Margins. One transaction is for PO only, the other one combines PO and Factoring. This transaction assumes the whole invoice is factored (no partial factoring)

(click on graph to enlarge!)

The first conclusion I saw was that in transactions that have a gross margin that is higher than 25%, combining products yields a higher total cost.

Some assumptions for the model:
1. Transaction time - 30 days for PO and 30 days for factoring
2. Factoring rate - 0.075% per day
3. PO financing rate - 0.01% per day
4. Invoice size: $125

Like all models, this is not all inclusive and certainly it's not perfect. But the lesson is the clear - model your own transaction before assuming the "industry truth" that combining products is always cheaper applies to you.

Addendum 11/7/10 - Here is a post to help you better understand the cost of factoring.
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Looking for information on purchase order financing? Read the purchase order finance blog

How to get Purchase Order Financing

2010-10-22T10:24:00.000-04:00

Today we will be doing a back to basics post. If you own a company and need purchase order financing, this post should help you find the best way to get to it. So, how should you approach getting purchase order financing?

The first step is to get educated. There are a lot of misconceptions about what purchase order financing is - and how it works. You can find a lot of resources in the internet. One good place to start is at the po financing resource center. Or you can also go here.

The next thing you need to determine is if your company will qualify for it. Here are some questions you should ask:

1. Are your gross margins more than 20%?
2. Do you resell products that are manufactured by someone else?
3. Do you have a non cancellable purchase order from your customer?
4. Does your customer have good commercial credit?
5. Is your business up to date in it's taxes?
6. Is the company free of liens, lawsuits and judgments?

If you answered yes to these questions, there is a good chance that purchase order financing will be a good fit for you. There is also a good chance that you will be able to obtain po financing.

The next step is to start calling companies that offer po financing to get details of how their specific plans operate. Many of them will be able to give you an approximate quote over the phone. Be sure to do you due diligence and call a few companies to learn their plans.

Some companies, though not all, may recommend that you also get factoring. Many times, factoring is offered in conjunction with purchase order funding (learn about the advantages and disadvantages of factoring).

Bear in mind that po financing transactions can be complex and have many requirements. I haven't listed them all here, but this should give you a good idea if you qualify for po funding.

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Looking for information on purchase order financing? Read the purchase order finance blog

The Dangers of Over Selling

2010-08-24T13:11:00.000-04:00

Many years ago, I was involved in a sales call with a prospect that needed a purchase order financing solution in place to be able to complete a large sale. The prospect really wanted to work with us, but in his excitement, she embellished things and oversold us on the opportunity. Here is a small sample of what transpired.

What she said:
1. My business has years of profitable operations
2. My business has lots of assets
3. My suppliers are financially strong and technically capable

Here is what we found out after the due diligence:
1. The business only had a limited operational history
2. Depends how you "value assets". Many where not valued realistically
3. The supplier companies she worked with had a marginal track record

Initially we were excited about this opportunity. But got less and less excited as new surprises started appearing. Once our due diligence was complete, we found that the real story differed from what the prospect had told us. In fact, it did not look like such a great deal after all. More importantly, we started wondering what other things had been embellished in the purchase order financing application.

Ultimately, we decided not to go forward. Even though the deal was doable, we were now uncertain of what other surprises would be lurking out there. In my view, it would have been better for the prospect to be upfront with us. For starters, we would have determined that they had a good handle of their business since their description would have matched our findings in the due diligence. Obviously, this would had increased their chances of being successfully funded.

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Looking for information on purchase order financing? Read the purchase order finance blog

Timing is Everything in Purchase order Financing

2010-08-04T10:16:00.000-04:00

One of the fun aspects of working in purchase order financing is that we deal with entrepreneurs on a daily basis. Many of our clients are startups that have been around for less than a year. It's not uncommon for us to be dealing with a business owner that is juggling one thousand things at the same time. Unfortunately, we have also seen many owners drop a ball or two or three.

One of the biggest mistakes I see if when an owner postpones applying for financing early in the game. Many postpone it because they have other "more important" things to handle - such as working with suppliers and clients to get a large order ready. There is a problem with that theory - our prospects come to us because they CAN'T deliver the order without our funding. Wouldn't it be logical that they spend some time ensuring they will have funding before committing to a client?

I see this every day. We get contacted by prospects early but then, they delay their application until the absolute last moment - say three weeks before a supplier needs to be paid. This gives us very little leeway to correct any problems that could crop up. If something goes wrong - the transaction usually falls through because the company is out of time.

The better approach is to begin financing discussions early - so that there is ample time to handle any potential problems. Here is a list of some common "problems" that derail purchase order financing transactions:

1. Suppliers won't accept our payment terms (e.g. letter of credit)
2. Supplier has a bad commercial credit record or bad delivery record
3. Clients are buying the goods as a guaranteed sale or a consignment sale
4. Client has bad commercial credit

Usually, items 1 through 3 can be addressed by re-negotiating a contract with a supplier or client, provided you have enough time to do it and provided your client/supplier is flexible. However, if you wait until the last minute and try to negotiate this AFTER the contracts have been signed and you are getting ready to start the transaction your chances of success will be minimal.

Being an entrepreneur is not easy - many times it means that you have to handle have to multitask and do many things - of equal importance - at the same time.

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Looking for information on purchase order financing?

What do you bring to the table?

2010-07-28T15:11:00.001-04:00

I recently put our home for sale using a flat fee MLS listing service. I decided to forgo of the services of a conventional real estate agent and do it myself. Why? Simple. I have used real estate agents a few times and I was not satisfied with their services, so I figured I'd take a go at it (note: I don't recommend this! Real estate transactions are complex.) I WILL use a real estate attorney to help me with all the documents though. Legal help is always a good idea when doing home transaction.

The first day I listed the property I got three calls. My heart sank when it was from agents that had seen my flat fee MLS listing and were trying to coax me into using their services. I kept an open mind and heard them out - in part because I am always looking at sales techniques. For the most part, they were disappointing. Most used a variety of inflated adjectives to describe themselves (e.g. experienced, knowledgeable and even "powerful" (!!)) but none of it backed it with facts (e.g. 20 years of experience in real estate, knowledge of the condo market, closed 15 transactions this year). If you think about it - their test is that they have to sell me on their ability to sell my property. They all failed.

There is an important lesson for anyone selling a product or service (like factoring or purchase order financing). People selling things shouldn't just focus on inflated words - they should use facts. And remember, people (or companies) don't buy products - they buy a solution to a problem.

--- Looking for information on purchase order financing? Read the purchase order finance blog

A Cold Christmas Season for PO Financing?

2010-07-16T11:07:00.000-04:00

Here is an interesting piece on how retailers feeling a holiday shiver. Retailers are no longer feeling as confident about the economy as they felt a few months ago. As the article says, many will tweak their holiday orders. This, coupled with the government's IT spending freeze, will probably give the purchase order financing industry a nasty double whammy for 2010.

The purchase order financing industry has a heavy concentration in the retail and government business sectors. Any decrease in these sectors will certainly have a negative impact in the industry. I guess my last two posts have had negative outlooks - I'll scour things to see if I can pick up some good news from somewhere. Unfortunately, the graphic I selected for this post reflects my opinion of the short term industry outlook.

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Looking for information on purchase order financing? Read the purchase order finance blog

US Government Freezing some IT Projects

2010-07-16T10:32:00.000-04:00

I saw this piece in the WSJ about how the US Government was freezing some IT projects. Obviously this is scary to many small companies that established themselves as government resellers because the US government spends about $80 billion a year in IT.

If this materializes, the effects in the purchase order financing industry will certainly be felt. Many purchase order financing companies fund small and midsized government re-sellers - many of which may be expecting reduced or canceled orders.

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Looking for information on purchase order financing? Read the purchase order finance blog

PO Financing Precious Metals and Stones (Gold, Diamonds and others)

2010-07-07T10:33:00.000-04:00

Every so often, we get a prospect who wants to use purchase order financing to finance a transaction to buy precious metals (gold bars, etc) or precious stones (diamonds, etc). The bad news - most finance companies (us included) will not finance those types of transactions. There are a couple reasons why we shy from offering purchase order financing for these transactions:

1. There is high risk of fraud: These commodities are valuable and have a substantial risk for fraud or robbery. Losses can happen because the product is altered or stolen at any time of the transaction. Since these commodities are fungible the risk of this happening is high.

2. Most have complicated structures

3. Criminal activity risk: Lastly, precious metals and gems can be used to launder money, usually unbenownst to many of the transaction participants. A diligent finance company that is involved in this type of transaction would need to spend a considerable amount of time and money in due diligence to ensure it is not (accidently) involved in an illegal transaction. And even then - there is still the risk that the due diligence officer may miss any problems.

Because of these risks, most companies in the industry will shy away from these types of transactions.

Who is your ideal client?

2010-07-02T12:30:00.000-04:00

Many small business owners take clients that they don't like - or that are not a good fit - simply because they need the money and want to grow the business. This strategy can work in the short term - especially if you need the money. It's hard to say no to a potential cash paying customer if you really really need the money.

One thing I learned from my own business is that taking clients that are not a good fit - that are not ideal clients - can hurt you in the long run. Many times you will find that:

1. They take a lot of time
2. They cause a lot of aggravation (and perhaps you aggravate them as well)
3. They sap your energy and the energy of your staff

I once read that every business owner should know who their ideal customer is, and spend their resources looking for them - and only them. This applies to us as well, of course. On the purchase order financing side, we have a set criteria of who we consider our ideal client/prospect. I'll share a few with you:

1. The must need business financing
2. They must re-sell products from suppliers
3. They must not manufacture or assemble the products that they sell (3rd party mfg is ok)
4. They must have gross margins of 30% or more
5. They must have a minimum of 50K in monthly sales (or 150K in quarterly sales)
6. Must sell to commercial entities of the US government

This seems like a nice all-encompassing list - but it isn't. It actually rules out a lot of prospects that would not be a good fit for us. I should note that we are NOT a good fit for them either :-)

When speaking with a prospect, I usually ask a series of short questions to determine if we are a good fit for them or not. Basically, they help me determine where they stand on items 1 through 6. I will talk about the criteria for factoring in my other blog.

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Learn about business loan options and factoring.

Good news for those in IT

2010-06-24T11:34:00.000-04:00

According to this article, Dell expects to see higher revenues as corporations go through with their plans to replace old IT systems. This is good for both computer manufacturer's and re-sellers. Fortunately for those of us in the purchase order financing industry, computer resellers make fairly good clients. Especially those that work with large corporate clients and/or the government.

There is one catch about using purchase order financing in IT re-sale transactions. IT transactions generally have margins that are lower than 15%, while po financing companies like to work with companies that have margins of at least 20% to 30%. This may create a problem for some transactions. At the very least, it will require that clients use some of their own capital for the transaction. Company owners should always be mindful of transaction costs and only use po financing in those transactions where they have an ample cushion.

I expect that companies in this industry will certainly benefit from this trend though.

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Looking for information on purchase order financing? Read the factoring blog.

Even Billionaires Have Cash Flow Issues

2010-06-22T17:47:00.000-04:00

I am a big fan of Planet Money - the NPR show and podcast about the economy. They did a recent post about a cash poor billionaire. In it, Elon Musk, the billionaire in question, declares that he is asset rich but cash flow poor.

This can be true for so many companies as well. In our case, they are purchase order rich, but cash flow poor and unable to deliver. I decided to post this link because sometimes our clients are embarrassed about needed our services (purchase order financing) - embarrassed about what their customers will think.

There is nothing to be ashamed of about asking for business financing, especially if you will use it to grow your business and help clients.

What PO financing can - and CAN'T do

2010-06-09T10:16:00.000-04:00

Here is a short article to tell you what can and can't be done with purchase order financing.

What you can do:
1. Use it to pay suppliers for finished product
2. Use it to grow your re-seller business
3. Handle large orders form credit worthy clients
4. Use it for product sales

What you can't do:
1. Use it to cover your own manufacturing expenses
2. Use it to cover payroll and other office expenses
3. Use the funds for anything other than paying your direct suppliers

Although purchase order financing is very flexible and works well with small companies, it can only help a businesses that fall within this very narrow definition: companies that buy goods from other companies and re-sell them without any modification to other commercial clients. In other words, it helps resellers and distributors.

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Looking for information on purchase order financing? Read the purchase order finance blog

Clothing Retailers Show Better Numbers

2010-05-20T11:02:00.000-04:00

It's well know that the garment industry has always had a close relationship with factoring. However, in the recent years, it's developed a close relationship with the purchase order financing industry as well. This is because many clothing items are now imported - and po financing is a major import financing tool.

According to the WSJ, a number of clothing retailers are reporting some decent numbers. We'll need to see how these numbers hold up, but they seem to indicate things are getting better. I think we are going through a funky time (for lack of a better term) in this recovery. Things are starting to look good.... and people are still asking whether the growth is sustainable. We hope it is...

No Rushed Deals Here

2010-05-13T17:31:00.000-04:00

Like most people in the industry, I get the occasional call from a prospect that needs purchase order financing "urgently" - in a rush. We pride ourselves of doing things efficiently and quickly - but I am always concerned when I get a call from a prospective client that tells me s/he has 4 days to get the deal funded or it's lost.

Usually, I decline those opportunities.

The overriding reason why I decline them is that it's hard to predict how quick the due diligence will be. It may be fast if everything checks out. It may be slow if we are missing information or if things don't check out. But we never know until we start.

Ultimately, we may end up with a disappointed or upset client if things don't go quickly or as planned. And we can be certain, that when people are rushing things, things have a higher chance of going wrong.

Weather you are looking for purchase order financing (or factoring), you are better of planning ahead and getting your financing lined up before there is an urgent need. It will prevent you from making rushed decisions when selecting your financing company, or making any rash decisions about a transaction.

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Looking for business financing in Missouri? Learn about factoring Missouri and invoice factoring Missouri.

Contradictions...

2010-05-06T11:02:00.001-04:00

In my business, the subject of risk comes up on a regular basis. Yesterday I told you a story about prospects that tell me that their business has no risk at all. Today I will tell you a story about contradictions. This is a generic story but I hear it a few times a year:

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It usually starts with a prospect that needs purchase order financing (or factoring). The prospect makes a very passionate case when presenting the transaction and insists that their customer is a good customer - they always pay like clockwork. No risk to us, they say (literally). The last phrase always raises my level of concern.

The discussions progress normally and then come to a GRINDING HALT when prospect realizes that s/he is liable if their customer does not pay. "What?!?", they say. They then make a passionate case that if the customer does not pay, it should be our risk, not theirs. Apparently, they think we should take that risk because we are (presumably) going to finance the transaction...
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I can see why people look to shift risk. We all do. What makes this type of situation interesting is that the prospect is usually defending the transaction saying (passionately) we should do it because it's risk-less...and then gets upset when they are unwilling to take the risk of the risk-less transaction they propose. The emotional shift is interesting to watch.

As I have said before, the only risk free asset is US Government T-BILLS. All other assets or transactions have risk.

Ultimately, transactions like this one never get funded. Why? Because prospects that believe their transactions have no risk tend to also have unrealistic expectations about everything.

By the way, there is a way to reduce the risk of non payment by a commercial customer. It's a product called Trade Credit Insurance.

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Learn about business financing in Michigan.Information about factoring in Michigan and invoice factoring in Michigan. More information about Marco Terry.

Factory Orders Jump - More Good News

2010-05-04T11:29:00.001-04:00

I mentioned in my last post that manufacturing seemed to be improving. Today, the WSJ posted an article about the jump in factory orders. Although most agree that the economy is not healthy (not yet!), it's certainly recovering. It may be a slow recovery - but a recovery nonetheless.

Even though we are in a recovery, getting conventional business financing is still pretty hard. Most institutions are being extremely cautious and only making business loans very very selectively. Because of this, demand for alternatives like purchase order financing will remain strong. Most purchase order financing companies are comfortable taking on higher risks than conventional financing institutions.

Also, purchase order financing is tied to consumer spending. This is because many retail suppliers who import goods, use purchase order funding. And, consumers are still spending a large portion of their incomes. Here is a post from the Planet Money blog about consumers are not saving a lot (thus, they are spending)

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Looking for business financing in Maryland?Learn about factoring in Maryland and Maryland factoring. More information in the factoring blog.

Improvements in Manufacturing

2010-04-27T10:50:00.000-04:00

This is a very short post. Both Caterpillar and Whirlpool delivered strong results, according to the WSJ. The article quotes an executive saying that during the crisis they saw demand plummet, then flatten and now it seems to be going up. Although two companies don't make an industry, this may be a bellwether of things to come.

It seems that lately we have seen a growing crop of good news about business. Let's hope this continues.

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Looking for business financing in Maine?Learn about Maine factoring and invoice factoring in Maine.

Why Housing is Important to the Purchase Order Financing Industry

2010-04-23T12:16:00.000-04:00

The housing market seems to be creeping up - slowly. I think most people would say that this is good for the whole economy. It's also very good for the purchase order financing industry, albeit indirectly. A large percentage of po financing clients tend to be suppliers to the so called big box retailers. There is a correlation between PO financing growth and retail growth.

Although retail sales have been surprisingly strong this is probably not sustainable unless housing recovers. Most individuals have a large portion of their wealth (and/or debt!) tied to a house. People saddled with homes that have depreciated in value still need to pay for them. They are usually stuck with the home, unable to sell it. Of course, this is good for the note holder (a bank or the "giant pool of money"). Not for the individual consumer though that hold the over-valued house. Why? Because presumably they'd be paying less - a lot less sometimes - if they had bought the house later (or if they rented). They see the big payment to the note holder as "wasted money". This gets complex because the "wasted money" is the note holders' profit/gain.

The economic ramifications of housing values are very complex. Few people truly understand them all. Unfortunately, I must admit I am not one of them. But what I do understand, is that a customer that is saddled with debt and with little disposable income is less likely to buy stuff..... and that's not good for the po financing industry.

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Learn about factoring and invoice factoring. Additionally, here is some information about business financing in Kansas and invoice factoring in Kansas and Kansas factoring financing.

Why are Gross Margins Important?

2010-04-21T12:16:00.000-04:00

Usually, 3 minutes into a conversation with a prospect I will ask about their Gross Margins. to many prospect, this is a personal question and are usually a bit shocked when I ask. But there is a good reason for asking. The gross margin of the transaction is very important in purchase order financing. There are two reasons why we think this is the case:

1. Transaction Safety
We view Gross Margins as a safety cushion that allows for things to go wrong without wiping out our client. Things that can go wrong include late deliveries and product spoilage.

2. Transactions Profits
In finance we use the concept of risk/reward. Basically, the riskier the transaction the higher the reward (or cost of financing). We consider po financing transaction to be much riskier than factoring transactions. This increases the cost. Since we want our clients to have an ample Profit Margin, most po financing companies will only finance transactions that have a gross margin that exceed 15%. This concept often confuses prospects because they are always convinced that their transactions are extremely safe. I will have to disagree. All transactions have risk - which is why the risk free rate in the US is tied to T-Bills.

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Looking for business financing in Indiana?Learn about factoring Indiana and invoice factoring Indiana. You can also check out the invoice factoring group blog.

The Importance of KIR (Keep It Real!)

2010-04-17T18:32:00.001-04:00

They say that entrepreneurs should be confident, positive.... optimistic. Sure, I buy that. But one of the most obvious red flags, at least for me, is when I am on the phone with an entrepreneur that is OVERconfident, OVERpositive...... and OVERoptimistic. These traits usually point to an entrepreneur that is not very experienced.

We prefer entrepreneurs that are cautiously optimistic, who show us how they are planning for the best to happen while having a solid contingency plan in case it doesn't happen. As we all know, business deals seldom happen according to plan.

If you are looking for business financing and are presenting your plans to factoring companies, I'd suggest that you present your growth expectations calmly and without hyperbola. This is especially true if you are looking for purchase order financing. Most companies looking for PO financing tend to be start ups with entrepreneurs full of vision but many times thin on accomplishments. It will gain the trust of your funding company.

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Looking for business financing in Hawaii? Learn about factoring Hawaii and invoice factoring Hawaii. Check out the new Canadian factoring blog.

Single Supplier vs. Supplier Chain

2010-04-09T17:21:00.001-04:00

The ideal purchase order financing transaction involves three one's. One supplier, who sells the goods to One Re-seller (our client), who sells the goods to One Customer. Why do PO financing companies prefer this type of transaction? Well, because it's simple. They pay the single supplier and the transaction ends when the single client pays.

Life is seldom simple, though.

It's not unusual to have a transaction with more than one supplier. Some of these can be done - others can't.

What CAN (usually) be done:

If you have an order for a number of products, and there finished products have to be ordered from multiple suppliers you may be able to finance your order if (and only if) your customer is willing to accept and pay for partial deliveries.

Why must your customer be willing to accept and pay for partial shipments? Imagine what happens if one of your suppliers fails to fulfill the order. You'd be stuck with the partial order and without the ability to get paid for it.

What CANNOT (usually) be done:

Same scenario as above but instead of one supplier, you have a supplier chain. You have a supplier chain if you are using a series of third party suppliers, who sell you parts that have to be then assembled into a final product. In other words you have supplier dependencies - suppliers who depend on the performance of other supplier. If your transaction has these dependencies, chances are that your order will be close to impossible to finance.

This may seem very inflexible. But there is a reason for the inability of po finance companies to fund these types of orders. Imagine what would happen if one of your suppliers fails? It can be a parts supplier or the assembly supplier. Either way, you end up with unfinished or shoddy product. However, the purchase order funding company will still have to pay the suppliers that performed well. Basically, they are out of money (paid to some suppliers) with no product for you to sell. This is just too risky. Other business financing solutions, such a business loans may work though.

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Looking for Connecticut business financing? Learn about factoring Connecticut and Connecticut invoice factoring. Learn more at the factoring blog.

Purchase Order Financing Basics

2010-04-04T08:28:00.001-04:00

PO financing seems to be a misunderstood from of business financing. Contrary to what it's name might imply, it's a fairly narrow for of funding. However, there are instances where purchase order financing can be a smarter alternative to a business loan.

Who can PO Financing Help?

First, purchase order funding is designed specifically to help resellers buy products to fulfill purchase orders. It can only work when the client is purchasing goods and re-selling them without any modification, alteration or re-manufacturing. In other words, the client buys product A from his supplier and sells product A to his client (at a mark up). Sometimes, po financing can also be used by companies that use third party manufacturing. But these opportunities can be complicated to fund if they have more than one supplier.

How is the Transaction Structured?

The structure of a purchase order financing transaction is very simple. Once you get the order, the purchase order financing company pays your supplier, who then delivers the product. This is a key difference between business loans and po financing since you don't get the funds - your supplier does. The transaction is completed when your client pays for the products. Payment is sent to the purchase order financing company, who does the settlement.

Here is the typical client profile for companies that use invoice factoring or purchase order financing.

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Looking for business financing in Colorado?Learn about factoring Colorado and invoice factoring Colorado.

Why you Care about the House Price to Rent Ratio

2010-03-19T12:02:00.001-04:00

I recently heard of a blog called Calculated Risk. They had a very interesting post about the House Price to rent Ratio. Wait! This is a trade financing blog. Why am I talking about a real estate measure? Simply, because many of our purchase order financing clients sell their goods to big box retailers - who then sell it to consumers. And, consumers care about the Price to Rent ratio, even if they don't know about it.

According to Wikipedia, the ratio basically "how much the buyer is paying for each dollar of received rent income". I interpret the data as meaning that renting is cheaper than buying. So, many homeowners are paying more in living costs than they should (if the economy where "efficient"). Sure, it's a simplistic interpretation but I also think it happens to be reasonably accurate. If you don't believe me, check out the Miami real estate market.

More money spent on housing means LESS money spent buying other things - especially luxuries. And here is where some in the factoring and purchase order financing industry will get hit.

p.s. - Why this pircture? "Se Renta" means "For Rent" in Spanish :-)

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Looking for business financing in Arizona?Learn about factoring in Arizona and Arizona factoring financing.

Negative Company Equity and PO Financing

2010-03-09T11:13:00.000-05:00

Thanks to the so called great recession we are seeing demand from companies that have negative equity. Basically, they have more liabilities than assets. The problem with financing companies with negative equity is that they have a high risk of bankruptcy.

Client bankruptcy is one of the biggest fears of any purchase order financing company. Obviously, companies that have negative equity are at a very high risk of bankruptcy. This is why most po financing companies shy away from these opportunities.

Getting business financing is not necessarily impossible. But you can expect to have to present a solid plan that will show how your company will emerge from problems. If your company is at this stage, you should consider getting some financial advice from a competent adviser - ideally someone who is familiar with turn-around situations.

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Looking for factoring in Saskatchewan? Learn about factoring in Saskatchewan.

Business in Turbulent Times

2010-03-04T10:56:00.000-05:00

I recently wrote about the risk of a double dip recession and on surviving a nasty recession. This week, most news articles seem to be more positive. We have jobs claims dropping and strong retail sales. Are we back to happy times?

One week, things are up and everything looks good. The next week, everything sinks and things look bad. It's been like that for those of us in purchase order financing. Many of our clients do business with retail chains so we are very sensitive to that industry. All we have at this point is a lot of contradictory information and limited guidance on the future.

So, what can we do? I opt for being conservative in both my analysis of the situation and my reactions to it. This recovery will be in fits and starts, it will go up, down, sideways, then up again. Basically, impossible to predict. Thus, I prefer to manage my expenses like a hawk but invest in sales and marketing.

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Looking for factoring in Prince Edward Island? Learn about invoice factoring in Prince Edward Island.

Double Dip Recession a Possibility - What to do?

2010-02-26T10:51:00.000-05:00

There is a lot of buzz in the press on the risk of a double dip recession. These fears are in part because we have conflicting economic indicators. Some look good. Others look bad. Some look really bad (employment). I tend to be cautious by nature and I think it would be wise to start preparing our businesses for another dip, or at least for a prolonged "flat" recovery.

So, how you you prepare to live to fight another day? There are some basics things you can do:

1. Invest in your company carefully - research the need for every expenditure.

2. Don't under-invest in marketing. I am a big believer in investing in marketing and sales while things look bleak. Just me.

3. If you think your company will need business financing this year - try to get it sooner rather than wait for it (but consult your financial expert!)

Item #3 is very important. We can assume that getting a business loan (or any form of financing like purchase order financing) will become more difficult if the economy does not improve. Therefore, getting your financial ducks in a row - sooner - rather than later will be very important. You should gather up all your financial data and discuss this with your financial adviser, CFO or CPA.

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Looking for factoring in Canada?Learn about factoring in Nova Scotia and invoice factoring in Nova Scotia.

Getting Business Financing is Tougher.... But doable.

2010-02-24T17:13:00.000-05:00

Ready? Set. Wait! That's what most companies that are looking for business financing hear nowadays. Most financial institutions have become very conservative (rightly so) and do a lot of due diligence and thinking before financing any opportunity.As many have found out - the financing moves like a pendulum. A few years ago it was very easy to get it. Now the pendulum has swung and getting a business loan is hard.

One important and often overlooked key to getting your application approved is making a good first impression. And to do that, you have to prepare. There are two key areas where this matters:

1. The first call: Be sure to know your business inside out and prepare by generating a list of possible questions/answers that the business financing company is likely to ask. And remember the three P's. Be Prepared. Be Professional. Be Punctual..

2. The Application: Your application is the first thing that the due diligence team will usually see. Believe it or not - looks matter. If your application looks professional and well done it will get better consideration than one that is sloppy. Most due diligence folks will probably deny this - but it's psychology and it's true. Now, I am not saying that looks alone will get you anywhere. But it will help your application get noticed, especially if your financials are reasonably strong. Here is more information about financing applications and financial statements.

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Looking for factoring in Canada? Learn about purchase order financing and factoring in Newfoundland and factoring in Labrador.

Financial Jargon 101

2010-02-23T17:45:00.000-05:00

This will be a quick post where I will depart from the traditional subject and focus on good old financial jargon 101. Last week, the Federal Reserve announced that they would raise the discount rate.

Many people confuse the term discount rate, fed funds rate and prime rate. Since these are important, I figured I'd try to explain them.

1. Fed Funds Rate: The rate at which banks (or depository institutions) usually use to lend money to one another. These transactions are usually done on a nightly basis. Go here for the current fed fund rate.

2. Prime Rate: This is the rate at which banks will lend money to their most favored customers. This is determined by surveying certain banks. Go here for the latest WSJ prime rate.

3. Discount rate: This is the rate at which eligible banking institutions can borrow money from the federal government. Go here for the latest discount rate.

These are thee common terms that are mentioned in the financial press on nearly a daily basis. Most other rates are based on these rates. For example, some financing companies fund their operations by using bank financing. Their loan will usually be based on prime rate. So the prime rate affects their cost of funds, which ultimately affects the price they charge their customers.

More on the benefits of purchase order financing on my next post :-)

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Looking for purchase order financing in Canada? Learn about factoring New Brunswick and invoice factoring new Brunswick.

Why Do PO Financing Companies Require Financial Statements?

2010-02-22T11:08:00.000-05:00

Most (if not all) purchase order financing companies will ask that clients submit a set of recent financial statements with their application. For some reason, 20% to 30% of prospects always object to this request. I know I am not alone because I have heard many colleagues gripe about this issue.

The most common objections we hear are:

1. We are a startup - we don't have/need financial statements
2. My CPA handles those..... and he has not made them in a long while
3. Our accounting system is not up to date
4. We don't use financial statements - they are a pain to make

Now, look at this list. Imagine what's going through the mind of your business financing company representative when they hear any of these explanations. It's not good. I know that I always cringe and get a feeling that the company requesting po financing is not very well organized. It's probably being run by someone who is relying on their memory and some bank statements.

While not having financial statements may work for some small owner-operated-and-run businesses, it wont for larger companies. It won't cut it for your financing company either.

A well run company - even a small owner operated business - but use financial statements as a tool to determine important indicators:

1. Profits centers
2. Cost centers
3. Inefficiencies

Purchase order financing companies need to look at these statements to determine their risk and to make sure they invest their funds wisely.

Most modern small business accounting packages (like QuickBooks or Peachtree) are simple to use and can generate good financial statements with a few simple keystrokes. If you don't know how to use them, consult a CPA. Most will help you for a modest fee.

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Looking for factoring in Canada? Learn about factoring in British Columbia and British Columbia invoice factoring.

How to get business financing - if you have bad credit?

2010-02-19T10:49:00.000-05:00

Not too long ago, I read some advice that was posted on a blog. Someone had asked for advice on how to get business financing in light of the fact they had bad credit. I was surprised to see that the expert answer was to sell the company to a friend/spouse with good credit, get financing and then have the friend sell you the company back to them.

Personally, I think this is a dangerous strategy. Before going into why, let me ask you. Does this sound like a good thing to do? Specifically, if you were the one providing the funding, would you be ok if someone did this to you?

This is why I think it's dangerous, and possibly naive, to try this:

1. This is the oldest and most well known trick in the book. Your business financing institution will usually do their due diligence before providing the funding. If they find that the company was recently sold they will usually ask a lot of questions and unravel this quickly.

2. I always advocate honesty. Having bad credit is difficult but being honest, in my opinion, is always a good policy. It won't be easy. Sure, some business loan companies may decline you. But there are many who appreciate and value honesty and can be willing to give you a break. I know for a fact, we have done that many times ourselves.

3. There is a chance your friend will have to sign a guarantee. The current business financing environment is very tough and many institutions are asking for personal guarantees from owners. If your friend has to sign one, their fate will be tied to the business you sold them. They many not want to go through with the financing.

4. It could create tax complications. You and your friend will need to consult a CPA to address how to report the quick sale and purchase back of a business to the IRS. I suspect, it will require lots of expertise and some paperwork.

5. Let's hope your friend is willing to sell the business back to you. No guarantees that your friend will sell it back to you. Good luck taking them to court if they don't.

6. Many financing contracts address this scenario. Lastly, many contracts have clauses that make the financing line contingent on the new owners also being approved by the insitution

Here is the tough answer to this question. It may be difficult, or even impossible, for a business owners to get a business loan if their (or their business) credit is bad. Period. You will usually be better of by being honest and upfront, and by trying to solve the situations that caused the bad credit in the first place.

Note: This article expresses only my opinion and it is not intended to be legal, financial or business advice. For advice, please see a qualified professional.

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Looking for business loan financing in West Virginia?Learn about invoice factoring in West Virginia and factoring West Virginia.

Purchase Order Financing - Government Suppliers

2010-02-17T12:33:00.000-05:00

We have seen a number of small businesses that are being created specificaly to supply products and services to the US government. For many, it's a good strategy since the US government is a great customer. They always pay their invoices on time.

However, they also place large orders. Companies that don't have the financial wherewithal to handle them, usually resort to purchase order financing or government contractor factoring. Both products share a common advantage - the amount of financing is determined by:

a) The quality of the invoice payor
b) The size of the order

The US Government has excellent credit and places large orders. Because of these advantages, many government suppliers are able to purse larger orders and bag in more revenues.

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Interested in business loan financing in Vermont. Learn about factoring Vermont and invoice factoring Vermont.

Self Employment and Purchase Order Financing

2010-02-16T17:56:00.001-05:00

A recent blog article mentioned that many self employed are incorporating. From a business financing perspective, this is probably something to be considered. Many business financing companies will not offer funding to unincorporated businesses. This has to do with the fact that personal and business liabilities can easily get mixed and generally shows an unsophisticated business owner.

Now, bear in mind that incorporating (or forming an LLC) is no guarantee that you will get financing. However, most funding companies are now requiring it. As a matter of fact, all the small business factoring companies that I know demand it, especially in this economic environment. Small business factoring companies are not a lone though - most factoring companies that I know (large and small) require it.

Disclaimer: This is not to be considered legal or financial advice. I am not an attorney.

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Looking for business loan financing in Texas?Learn about factoring Texas and invoice factoring Texas.

Pay when Paid and Purchase Order Financing

2010-02-10T12:09:00.000-05:00

I recently wrote about the subject of pay when paid as it relates to invoice factoring. "Pay when paid" is something that crops up in the world of purchase order funding fairly regularly as well. The scenario is fairly similar to the one in factoring though.

Basically a reseller gets a large purchase order and tries to use po financing (learn bout po financing benefits) to fund the order. However, the PO states that the reseller will only get paid once (and if!) their client is paid themselves. There are many things that can go wrong with these, some of which were outlined in the prior post.

Ultimately, we (and most of my competitors) will not finance those transactions because of the risk of non payment. Pay when paid can be a deal killer - at least for us.

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Learn about business loan financing in South Dakota. Or get information on factoring South Dakota and invoice factoring South Dakota.

Prepaying Foreign Suppliers in Cash

2010-02-09T11:04:00.000-05:00

One very common scenario is to have a client request that we prepay their foreign supplier in cash - rather than with a letter of credit (or cash against documents) which is our preference. Many prospects are often disappointed when we tell them we cannot prepay their suppliers by wire transfer.

There is a very logical reason why we do this. That is because if something goes wrong, we have no recourse against the foreign supplier. If they do something wrong - or worse ship no product - the only recourse we have is to sue in their own country. That is always a losing proposition.

Now, think about it this way. If we prepay for goods in cash we are basically giving the foreign supplier the equivalent of an unsecured business loan. Why would we do that? Especially, when our area of expertise is purchase order financing - not "unsecured cash loans to suppliers in distant lands".

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More about business loan financing. Interested in business financing in Pennsylvania? Learn about factoring Pennsylvania and invoice factoring in Pennsylvania.

Hiding The Truth - And Searching for It

2010-02-03T10:45:00.000-05:00

Years ago, when I first started my career in purchase order financing, I was evaluating a prospect and I asked him if his business taxes were OK and up to date. His answer was "Don't worry, we have a CPA handling all our taxes". I initially took her answer at face value but felt uncomfortable with it later that evening.

The next morning, I asked the prospect for permission to speak with her CPA and ask questions. "Go ahead", he hesitated. "I'll give the CPA a heads up".

I called the CPA, who tersely informed me that he would answer anything I ask, but could only answer Yes or NO questions. He was not willing to volunteer anything. That was a bad sign. And pretty creepy too. I was able to find - by asking 4 question - that the prospect had serious tax problems and was facing a criminal inquiry. Needless to say, we declined the deal.

That prospect answered my initial question with a weasel answer. Not technically a lie. But clearly trying to deflect being straight forward from the get go. I am surprised he let me speak with her CPA rather than declining to proceed.

Most people in the business financing industry deal with weasel answers everyday. Not as blatant as the situaiton I just described - but weasel answers nonetheless. Personally, I value prospects that provide direct answers, even if they think they are not what I want to hear. Many times we can work with challenges - such as liens and judements - if we know of them ahead of time. Being direct about a major issue shows honesty and willingness to work - in my view.

Whenever I find myself dealing with someone that gave us a weasel answer (i.e. deflected a question or hid information) I find myself double checking everything I do. Why? I have no idea if previous answers or information was also incomplete, thus we move cautiously and start asking lots of questions. It's only good dilligence to do so.

I can't speak for everyone, but I suspect anyone that offers any finance product (a business loan, factoring, invoice financing or other) has a similar view. In my humble view - honesty is a good policy.

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Looking for business financing in North Dakota? Learn about factoring North Dakota and invoice factoring North Dakota (or general factoring).

Is the tide turning? Personal incomes are up.

2010-02-01T11:04:00.000-05:00

In my other blog, I wrote about the effects of the rise of the national GDP and the relation to the factoring industry. Today, we get news that personal incomes and consumer spending also rose. Sure, both of these events are probably related, and as many economists state, this happened because of a whole bunch of "one time" events. For example, a large part of the personal income growth was due to a one time social security payment.

Ok. Sure. A whole bunch of "one time events" perhaps, but a good combination nonetheless. Although economists are not predicting robust growth this year, they are predicting growth. I am not saying that we should all jump up and uncork the Champagne but this is good and could potentially kick-start some areas of the economy.

How will all of this affect the purchase order funding industry? Positively, I expect. Purchase order financing is all about financing inventory that is in transit from the supplier to the end customer. Companies can only keep lean inventories up to a point - otherwise they start affecting revenues and profits. So, some will start purchasing goods.

The current situation may help those in our industry. Many companies will be unable to get a business loan just because credit is hard to come by these days and will need an alternative source of business financing. PO financing is one of such alternatives.

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Need business loan financing in New Mexico? Learn about invoice factoring New Mexico and factoring in New Mexico.

Combining Purchase Order Finaning with Bank Financing

2010-01-27T12:09:00.000-05:00

When banks or institutions give you a business loan they also file a UCC lien securing their collateral. Usually, one of the items they ask for as collateral is Accounts Receivable. This is very common for most business financing transactions.

This usually kills your chances of getting purchase order financing. Purchase order finance companies will also need first position on your accounts receivable which the business loan is already claiming as collateral.

Why is this? If you think about it from a purchase order financing perspective, the actual "collateral" is the invoice that is generated by the order that they fund. Usually, the bank will not relinquish their position and the deal dies...... unless the stars align correctly.

One way to handle this situation is to see if the bank is willing to subordinate certain purchase orders, to be funded by the po financing company , who in turn is taken out by the bank when the order is delivered an invoice is generated. It's a bit tricky but it can be done in certain circumstances.

The net effect is that the purchase order financing company funds the inventory purchase and then the bank funds the A/R component. This can be important because many business loans have covenants covering inventory percentages. If structured correctly, this can work to the banks benefit.

Don't get me wrong - pulling this off is not easy. Your financial institution will probably have you jump through a couple hoops before approving this type of a transaction - but it's possible under certain scenarios (too complex to describe here).

Note: this article should not be construed as financial or legal advice.

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Looking for business financing in New Hampshire? Learn about factoring in New Hampshire and Invoice Factoring New Hampshire.

The Slow Recovery

2010-01-25T12:03:00.003-05:00

The Miami Herald had an article titled "Slow recovery continues." What's interesting is that if you get past the headline, the news is not that bad. For starters, business spending is expected to go up. This will benefit many purchase order financing companies that sell business supplies. This will also trickle into LESS job loss and perhaps even a small job GAIN.

One thing that caught my interest is that the article said also that prices were starting to increase. This can mean many things. On the positive side, it could mean there is enough confidence in demand. Lets not forget that many companies have had to SLASH prices. Alternatively, it could mean that inflation is arriving. I think it it's probably the former. Businesses have been slashing prices so they are now recouping a little bit.

Now, let's all hope for a recovery that grows at a sustainable rate.

Looking for business loans in Montana? Go here to learn about the alternative, factoring in Montana and invoice factoring in Montana.

Massachusetts State of the Economy

2010-01-22T12:01:00.004-05:00

The Boston Globe, in my former state of Massachusetts has released a state of the economy piece. This is somewhat similar to what was done in Florida (read about the Florida outlook here). I am sure many major newspapers are doing this. It is a very well done piece. Unfortunately, the main theme is Jobless Recovery. At least they are not using one of my most hated terms - job LOSS recovery.

With all these bad news - is there a glimmer of hope? Yes, according to the federal reserve publication. It's just that we are going through a period of turbulence with lots of ups and downs. Fasten your seat belts......

Looking for factoring in Mississippi? Learn about business financing in Mississippi and factoring in Mississippi.

No Experience - That Could Spell Trouble

2010-01-22T11:35:00.002-05:00

We get a lot of start ups that are looking for business financing. Many of these are created by seasoned veterans who just want to hang their own shingle. Others, are created by people with a dream.... and little else. No experience whatsoever.

Many believe that purchase order financing companies only focus on the strength of the purchase order. They are wrong. They also focus on the clients ability to deliver the purchase order. Clearly that's a key piece of the puzzle.

If you start a company and need funding, unless you have experience yourself, you'd be wise to consider working with some experienced people (either by hiring them as employees or advisers, whichever works best for you). Otherwise, you risk not getting the funding you need.

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Looking for business financing in Michigan? Go here for information on factoring Michigan and invoice factoring in Michigan.

In Purchase Order Financing - Timing is Very Important

2010-01-20T11:04:00.002-05:00

One very common reason purchase order financing transactions fall through is bad timing. Many times I have seen professional, competent business owners blow a transaction because they could not keep track their time frames.

Here is a story about a deal that went bust about 6 months ago. Some details have been changed to make this a fictional story, but the lesson remains.

A business owner had started a new company and was looking for purchase order financing They were hoping/expecting to get a $1,000,000 government order in about 4 weeks. We explained the process to him and it seemed to be a very good fit. We also explained that we can process individual purchase orders rather quickly, but setting up the initial account takes about 3 weeks. We suggested that they promptly submit an application to ensure that the proper financing was lined up should he win the transaction.

We did not hear back from this prospect until a month letter. He announced that the had just won the PO, which had an aggressive time frame. The supplier needed to be paid in two days and the goods delivered in two weeks.

Now, even in the best of cases, setting an account takes a minimum of one week. We prefer to budget for three weeks because life is seldom perfect. The client was advised that we would not be able to fund this transaction due to time frame issues , but would be happy to work on the next transaction.

The client looked for business financing in many other places but could not find someone willing/able to fund this transaction. Ultimately it fell through. To add further problems, he defaulted on a government order which is never good.

By the way - we would have loved to fund the purchase order. We declined because we knew, from experience, that we would not be able to live to the clients expectations. Now I ask this to all readers?

Is it reasonable to expect 1,000,000 in a few days, without having the financing company do any due diligence? Would you fund it? (if you answer yes, please email me your phone number!)

Taking the time to line up financing prior to winning the order was key to the success of this transaction.

It's unfortunate that this is not an unusual event. We see this daily. It's also very preventable. Just follow this simple rule:

'Don't sell any products unless you have the funds (or financing) to pay for product. Otherwise, you risk losing the transaction, your customer and your business'

Looking for business loan alternatives in Maine? Find out about factoring in Maine and invoice factoring in Maine.

The Real Misery Index

2010-01-18T11:49:00.003-05:00

When it rains it pours. I recently posted a short blurb about the US Misery Index. Well, I found that the Huffington Post has calculated what they refer to as the real misery index

I don't know which one is better, but it would seem that the Huff Post's index does a better job at comparing the magnitude of misery from the last recession and this one. I find it an interesting calculation.

Looking for business financing in Kentucky? Learn more about factoring in Kentucky and invoice factoring in Kentucky.

Purchase Order and Invoice Verifications

2010-01-18T11:21:00.004-05:00

I recently wrote about the importance of verifications in invoice factoring programs. Most purchase order financing programs have similar - if not more stringent - verification programs.

In factoring, the company needs to verify that the invoice is correct and will be paid. In purchase order financing, the company needs to verify that BOTH purchase orders AND invoices are correct and valid.

This means that the company has to verify that:

1. The purchase order is correct and final
2. The actual PO numbers
3. The PO contractual terms

And then (unless a factoring company handles the A/R part of the transaction), the company needs to verify:

1. That once the order is fulfilled and a valid invoice is created
2. That the invoice is accurate and payable

This is the main reason that most professionals say that purchase order financing is a "hands on" process. However, the other side of the coin is that po financing is very flexible and available to small and growing companies.

Are you looking for business financing in Kansas? Learn more about factoring in Kansas and invoice factoring in Kansas.

The US has a Misery Index

2010-01-16T08:15:00.006-05:00

I find it somewhat funny (and interesting) that the US has a Misery Index. It basically adds unemployment + inflation. It stands at 11.84. I find it interesting that someone is trying to peg a number to "Misery". Probably not very accurate, but still, the site is interesting to read.

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Looking for business funding in Indiana? Learn more about invoice factoring in Indiana and Indiana factoring companies.

Want a HELOC to finance your business ? Good Luck

2010-01-14T10:00:00.003-05:00

Many entrepreneurs and business owners have funded their businesses by getting a home equity line of credit (HELOC). Needless to say, the current real estate implosion has affected the ability of owners to get a HELOC. I suspect that banks are only providing HELOC's to owners who have a lot of equity in their homes as well as lots of other assets. Or in other words, they are only providing funds to those that don't need them, as it's commonly said :-) The fact that foreclosure is a problem for many individuals and has reched epic proportions is not helping matters either.

If I were a betting man (I am not!) I would estimate that getting a HELOC will be difficult for a number of years, especially in hard hit markets like Florida, California and Nevada.

During boom times it was common to see factoring and purchase order financing prospects walk away from term sheets and get a HELOC to fund their business or transaction. I don't think we will have that scenario repeating itself, a least for a little while.

Looking for business loan options in Georgia? Find information about invoice factoring in Georgia and factoring financing in Georgia.

Why does PO FInancing Require High Gross Margins?

2010-01-14T09:33:00.003-05:00

You have probably heard that purchase order financing companies usually get involved in transactions that have a minimum average gross margin of 20% (this number fluctuates a little bit).

Why is this the case?

The answer is simple. The purchase order finance company covers the Cost of Goods Sold (COGS) of the client. The Gross Margin ( which is the the (Sale - Cogs)/ Sale) must be able to cover:

1. The business owner's profit
2. The purchase order financing fee
3. Any incidentals such as breakage, disputes, delays, etc.

The biggest unknown of the three items is "incidentals". Entrepreneurs and business owners can sometimes be excessively optimistic about the capabilities of their suppliers. The cold hard reality is that many times, things go wrong. Sometimes, they go spectacularly wrong. Working with transactions that have an ample gross margin protects both clients and purchase order financing companies by increasing the chances that any incidentals will be covered out of the gross margin.

Are you looking for business loan alternatives in Florida? We can help you find factoring in Florida. Go here for invoice factoring in Florida information.

Purchase Order Financing in Canada

2010-01-13T12:15:00.004-05:00

Purchase order funding has been gaining quite a bit of traction in Canada. It is a niche product that is mostly offered by a few specialty finance companies (and a couple of factoring companies). We have discussed the basics in other posts, but in summary, purchase order financing gives you funds to pay your suppliers so that you can fulfill orders.

Some product restrictions include:

1. Profit margins must be at least 20%
2. You must be a reseller of finished goods.
3. The order cannot involve any customization/installation tasks

There are some other important details about how purchase order funding works, but these are a good start. You can find resources on purchase order financing and learn about the benefits of purchase order financing by going here.

Looking for business financing in Colorado? We are a leading provider of factoring in Colorado. For information about factoring and purchase order financing in Colorado

Purchase Order Funding - More Resources

2010-01-12T11:28:00.004-05:00

I have posted some resources on purchase order funding. There are some additional resources out that that we wanted to share. Most of these purchase order funding resources are articles that describe how po financing works and how it can be used in certain transactions.

So, if oyu are researching purchase order funding for a transaction, or just looking to learn more, you have come to the right place.

Articles:

1. What is purchase order financing?
2. Purchase order financing basics
3. Purchase order funding - distributors and wholesalers
4. Purchase order financing for resellers and trading companies

There are a whole bunch of resources available on the internet, but these are certainly a good place to get you started.

Trade Gap is Up - Good for PO Financers?

2010-01-12T11:15:00.004-05:00

A recent article mentioned how the trade gap has ballooned. There are many reasons for the increase, but a large part of it has to do with the price of oil.

Most purchase order financing companies make their living financing import companies. So, one could argue that a trade deficit will have a positive effect in the industry. I'll repeat though - I am not saying trade deficits are good. Actually, most people agree that a trade deficit is not a good thing, especially in the long term.

But there is a catch though. Oil, the product that happens to be driving a large part of the imbalance, is not the type of product that is financed with purchase order funding very easily. There are a few reasons for this. In no particular order, they are:

1. Transaction profit margins
2. Volumes
3. Involved parties

Most will agree that while oil trading transactions have substantial volumes, they have very low margins. It is a commodity after all. That in itself, usually kills the chances of using purchase order financing. We'll talk about the other items, some other time.

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Looking for business financing in Arizona? We can provide information about factoring financing in Arizona. We are a leading invoice factoring company in Arizona.

China Becomes the #1 Exporter

2010-01-11T10:01:00.006-05:00

This morning I heard on NPR and also on the WSJ that China had become the #1 exporting country, getting ahead of Germany. Many purchase order finance companies have made a substantial business by funding US and Canadian companies that import goods from China into their respective countries.

This does not necessarily affect the industry at this time, but it's an interesting fact to know.

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Looking for business financing in Alabama? We can offer purchase order financing and factoring in Alabama. Learn more at factoring in Alabama.

Purchase Order Financing - Resources

2010-01-08T09:26:00.003-05:00

As I mentioned in my other blog (invoice factoring blog) a number of readers just come to this blog to learn more about purchase order financing - basically because they are wondering if it will help their company. We have a purchase order financing resource area with a number of articles that can help. Here is a few of them:

1. What is po financing?
2. Growing your import business with po financing
3. Using purchase order financing to fund your big sale
4. Unlimited sales - How PO Financing can help

There are additional resources for purchase order financing at the site, but these articles are a good start.

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Looking for information on purchase order financing? Read the purchase order finance blog

CES - Off to a Good Start

2010-01-07T17:04:00.005-05:00

Apparently, the Consumer Electronics Show is off to a good start. The show opened today.

What does this have to do with purchase order financing? More than you think. Many purchase order financing companies focus on wholesalers that sell products to big box retailers. Many of these wholesalers focus on selling electronics. And there is where the connection lies.

The "vibe" at CES is that things are getting better, and thus companies are investing more to show their wares. Hopefully, this will ultimately translate to sales and revenues.

As I have said in prior posts, we are now starting to see glimmers of good news. Hopefully this momentum will eventually translate into a growing economy and more importantly - jobs.

In the mean time, like most purchase order funding companies, we are still going to focus on government suppliers.

Need a reminder of how purchase order financing works? Check out these purchase order financing resources.

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Looking for information on purchase order financing? Read the purchase order finance blog

Jack of all trades "Government Suppliers".

2010-01-06T11:55:00.005-05:00

Lately, I have seen an increase in government suppliers that are looking for purchase order financing. It's no secret that factoring companies like working with government suppliers because the US government is a great payer.

One thing that I have noticed is that the number of "jack of all trades" suppliers is increasing - dramatically. These are suppliers that claim they will sell anything and everything to the government. Form IT Equipment, to radios, to cleaning supplies to food. All by themselves. More often than not, the "jack of all trades" supplier is a single owner (or husband and wife team) entrepreneur who started their company intending to be a government supplier.

In my experience - most of these fail. Period. That is not to say that some will succeed and do nicely. Sure. But those are few and far between.

There are probably many reasons for this but I'll hazard a guess. Most government purchases are highly specific, which requires specialization. The government even has specifications for buying simple things like mops. Imagine their specifications when buying complex things like IT equipment, or radio equipment , or electronics. Few business owners could develop the expertise and the supplier relationships to be able to service all types of contracts. What a juggling act! How can they develop meaningful supplier relationships if they go fishing for a different supplier for every order? Also, how can they can develop sufficient volume with any supplier to get favorable terms?

There is another catch. Profit margins in government sales are low because of competition. The only way these supplies can make a living is by getting their product at rock bottom price and by fulfilling large orders. Again, the focus seems to be volume and specialization.

But this makes sense. How many successful companies started and became successful by doing disparate things. That's also why the only business financing we offer is factoring and purchase order financing only :-).

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Looking for information on purchase order financing? Read the purchase order finance blog

General Business Financing Resources

2010-01-05T11:13:00.003-05:00

I plan to put some posts out that contain useful links to business financing resources. These are just some articles that were written a few years ago. Some of these are even more relevant today, since the economy is not doing well:

1. How to get paid by clients on time
2. What is trade credit? How to offer payment terms
3. Understanding invoice factoring - a business case

We have a number of resources in the articles section of the site and cover a whole number of subjects from factoring to purchase order financing.

Additionally, more information on factoring and purchase order financing can be found here. You can also find more information here and here.

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Looking for information on purchase order financing? Read the purchase order finance blog

I need funding.... Fast!

2009-12-03T14:23:00.002-05:00

We pride ourselves of being able to move fast. As you can imagine though, speed is in the eye of the beholder. One thing that we find concerning is when we get a call from a client that needs funding in a week or two because they committed to an order that they can't deliver without funding.

Here is the typical scenario we see often. We get a call from a prospect saying they have a great opportunity. During the conversation, it becomes clear they have already made the sale and committed themselves to making a delivery. However - they can only perform if they get purchase order financing. And they need it fast! Within a week or two, because the clock is ticking..... Otherwise, they order falls through.

I consider this scenario very very risky. They have committed themselves without the certainty that they can perform. Many times, the end customer is not aware of this either. I suspect that many underwriters grit their teeth when they see this scenario and also wonder what other risks this company is taking......

A safer strategy is to try and get purchase order financing (or your other type of business financing) before you win the transaction. That puts you in a much better position to deal with any unexpected problems, such as delays.

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Looking for information on purchase order financing? Read the purchase order financing section of factoring articles, or the purchase order finance blog

Purchase Order Funding - Information

2009-12-02T09:34:00.002-05:00

Are you researching purchase order funding? I have found that many readers come to this blog to research purchase order funding. Since we have a number of resources available on the subject, I wanted to make your life easier and share a few articles with you:

1. What is purchase order financing?
2. Purchase order financing for distributors and wholesalers
3. Importing goods from China? Consider purchase order financing
4. Growing your import business with purchase order financing

This is just a small sampling of articles from the po funding resource area, there are certainly more articles at the location.

Of course, you can also learn a lot just by reading this blog!
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Looking for information on purchase order financing? Read the purchase order finance blog

PO Financing vs. Production Finance

2009-11-21T10:50:00.004-05:00

One common mistake that prospects make is to confuse purchase order financing with other forms of financing, such as production finance. The confusion is understandable, the name "purchase order financing" sounds intuitive and many people assume that it means that any order can be financed. Unfortunately, that is not correct.

Purchase order financing companies will only finance certain types of purchase orders. Specifically, for an order to qualify:

The client must be a re-seller and not a direct manufacturer. Using a 3rd party manufacturer is ok though
The client must buy all the goods from the order from a single source. Said differently, each order must have a single supplier.
The profit margins must be at least 15%

Here is what purchase order CANNOT do:

Help finance the machinery to deliver on a purchase order
Cover employee expenses or rent

These last two points fall under the real of production financing (or perhaps a business loan or line of credit)

Be sure to read our new information section on po financing at factoring articles.

Why do Purchase Order Financing Applications require Personal Information?

2009-11-20T17:50:00.008-05:00

Many clients are usually perplexed when they find out that many purchase order financing companies require that they submit personal information about the owners as part of the application. "Why?", they ask. "I am not asking for financing for me, but rather for my company".

Let me give you a purely hypothetical example to show things from a different perspective. Obviously, as examples go, this one is a little extreme. This is done to emphasize the point:

Case 1 - Jill. She has a criminal background that includes felonies. Furthermore, she has a record of passing bad checks, not paying taxes and is currently being sued by credit card lenders and collection agencies. Jill decides to start a business, and the company is able to generate some sales. As a matter of fact, the company grows because Jill is such as persuasive salesperson (and owner). Jill decides that purchase order financing can help her.

Case 2 - Jana. Jana has no criminal background and pays her taxes on time. She has no open or pending lawsuits. Jana decides to start a business, and the company is able to generate some sales. As a matter of fact, the company grows because Jana is such as persuasive salesperson (and owner). Jana decides that purchase order financing can help her.

Both cases describe the same business. The only difference between these two cases is the owner background.

Would you feel comfortable funding Jill's business? Perhaps some business financing companies would - but most would not. Why? Well, for starters she is not paying taxes. That's never a good indicator and does not bode well for anyone. She is also being sued and has a criminal background. Some time ago I wrote about the 5's of business financing. One of the "c's" was Character. Specifically, the character of the business owner.

Unless your purchase order financing company knows you personally, the only way they can determine whether the business owner that they are dealing with is good to work with is by asking for a lot of personal information and doing due diligence. And remember, although your finance company may be providing the funds to your business, they depend on the business owners to carry out the plans and manage things diligently and honestly.

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Looking for information on purchase order financing? Read the purchase order finance blog

Why PO Financing Does Not Mix with Bank Financing?

2009-11-19T18:04:00.004-05:00

Lately, I have been getting calls from prospects that have a line of credit or business loan and want to add PO financing to their business financing mix. It seldom works.

The reason is simple. A purchase order financing company usually secures their position by filing a lien against the receivables (invoices) generated from the orders it finances. However, most financial institutions will also file a lien that encumbers the company's invoices when the company gets the small business loan.

Note that institutions do this for most business loans - even those that are used to buy an asset such as real estate. Perhaps, more surprising is that business owners find out about this when they talk to me and we do a record search. 9 out of 10 times they didn't even know that they institution was doing this. By the way - institutions seldom this behind their backs. It's all very clearly spelled out in their loan documents. (The lesson: always read and understand legal documents before you sign them)

Why does this eliminate the possibility of getting purchase order financing? For the simple reason that the purchase order financing company wants to have a first position security interest in the invoices that are generated by the orders they fund. Otherwise, if a client defaults the business loan, the institution could claim the proceeds from the invoices as collateral.

Some banks may be willing to subordinate their position and allow you to work with a po financing company, but this seldom happens, especially in these recessionary times.

Disclaimer: This article does not offer legal or financial advice. If you need it, get an adviser.

I also wrote about this subject as it relates to factoring.

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Looking for information on purchase order financing? Read the purchase order finance blog

One Bright Spot in Employment

2009-11-09T16:51:00.002-05:00

One of the leading economic indicators, in my option, is the level of employment in the temporary staffing industry. It's a "leading" indicator because it goes up (or leads) ahead of conventional employment. The reason is simple - employers prefer to hire temps before hiring permanent staff. The WSJ recently posted an article that said just that - temporary employment is on the rise. Some of the rise is seasonal, due to the holidays.

Regardless, this is good news. It will prove good for factoring companies that offer factoring for temporary staffing agencies. In my small world - this is good news.

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Looking for information on purchase order financing? Read the purchase order finance blog

CIT is bankrupt. Now what?

2009-11-04T14:55:00.004-05:00

As I have mentioned in some posts (in my other blog) I have been following the fate of CIT
with particular interest. You can find a post here and here. CIT is the USA biggest factoring company - with 8B in factored receivables. One concern I have always had is - what will happen to their clients - and - what will the impact on the economy be? Her is an article on the WSJ that talks about the concerns of CIT's bankruptcy.

I suspect - this will be a double edged sword. Initially, it could be a boom for the factoring and purchase order financing industry as they pick up some clients form CIT. The effects on the economy could be very negative. One important aspect of this bankruptcy - clients could see their lines of financing modified or eliminated, which would affect their ability to meet current expenses and possibly lead to layoffs and business closures. Not a good scenario - and I hope it does not happen.

The same goes for companies that were hoping to get other types of business financing form them - such as a business loan.

Hopefully the bankruptcy will work out for everyone - otherwise we stand to lose quite a bit.

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Looking for information on purchase order financing? Read the purchase order finance blog

The Recession May Be Over - But Signals are Mixed

2009-10-29T11:07:00.003-04:00

We are going through a period of mixed signals - common when recessions start turning into growth. For example, this article talks about the GDP growth. Another article talks about a slight increase in durable goods orders. But they both also contain negative data about unemployment and the housing market.

All in all, this is a mixed bag.

Although the reductions in bank financing have been a boom for companies in invoice factoring and purchase order financing, the industry as a whole had a bit of a lousy year. Sure some companies did great. But many others left the industry because of bad deals or due to lack of financing. Yeah, some purchase order financing companies are financed by banks or hedge funds and had their lines cut off (learn more about how po financing companies are funded).

Personally, I have seen overall improvements and think things may get better. But I also know how fragile this recovery is, thanks to the housing mess and high unemployment. I, for one, will keep my fingers crossed.

(p.s. Check out the purchase order financing resources to learn more about po financing)

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Looking for information on purchase order financing? Read the purchase order finance blog

Presenting yourself and your business

2009-10-13T10:19:00.003-04:00

Several months ago I had a call from a prospect that wanted purchase order financing. During the first 5 minutes of conversation, it became clear that the prospect was not up to speed on their own business. Their introduction went reasonably well until I started asking questions. Even the most basic question required that they stop and think for a while, only to produce an unacceptable answer.

Basically:

1. They could not tell me their line of business with any clarity. They could also not articulate how they got started in their business or what their level of experience was

2. They were not able to tell me if they had won the orders that needed financing, or if they were only bidding

3. Although they needed financing for two simple orders, it took him two minutes to ruffle through the orders to tell me what they were for. (By the way, they were simple, as in, the client wanted 100 widgets)

4. He had no idea of the size or expected gross margins on the orders

Although we spoke for 20 minutes, the prospect was not able to give me a single piece of actionable information. Ultimately I excused myself because I had a meeting to attend to and ended the call.

It was clear to me that the prospect had not prepared themselves, even in the slightest most basic way, to present their business for financing. How can they expect to land business financing if they can't answer the most simple questions about their company? Factoring and purchase order financing can be easier to obtain than a conventional business loan - but they still require that you prepare yourself to answer questions about your business.

By the way, the world of business financing is not different from other types of venues where first impressions can be last impressions.

Note: this post does not depict a real call or real prospect - but rather a collage made from several experiences.
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Looking for information on purchase order financing? Read the purchase order finance blog

Four Reasons Small Companies Fail

2009-09-22T17:25:00.004-04:00

Depending on whose statistics you believe - the odds are stacked against entrepreneurs. Folk wisdom says that only 1 in 10 business survive the first year. And of those, only 1 in 10 make it to the 5th year. I doubt these statistics are accurate but I know for a fact that most start up companies won't make it past their first year.

Why do these businesses fail? Many books have been written about this subject. However, I'd like to pitch in my 2 cents.

Being in the front lines of the purchase order finance industry gives me a front row seat into this phenomenon. I speak to entrepreneurs every day of the week. Many of these fail to realize their dreams. Now, I can usually tell whether the start ups will take off or not by asking four questions. I believe these questions also provide an answer as to why many start ups fail.

1. What led you to start this company?

This question always gets interesting responses. Answers range from "I want to get rich",to "I saw an opportunity" to "I want to be free". The latter one is good for laughs since most entrepreneurs work harder than most folks.

I ask this question because it gives me a good glimpse about the person running the company.

2. Where did you learn the industry?

Many people learned their industry from their current jobs and are branching out on their own. Other learned a brand new industry by speaking to experts. Some, even learned it by reading a book - or many books. Regardless, I always prod them by asking technical questions about their business. How they answer those are a very good predictor of their knowledge and critical to their initial success.

I ask this question because it gives me a good idea of the depth of their experience.

3. How long have you been at it and have you made your first sale?

This one is obvious, companies without sales don't last. But there is a hidden undertone here, I know of successful company that went on for 9 months before closing their first client. I this this shows stamina and determination. Starting a business is a marathon and requires a certain single mindedness. By the way, that company owner that took 9 months to close their first client was none other than me!

I ask this because it gives me a good idea of their current level of sales and their stamina.

4. How much money did you put into the business?

Business books are full of stories of millionaires and billionaires that started their company with $100 or $1000 dollars..... These are the exception and not the rule. Most businesses, even single person companies, require a substantial investment. A few thousand dollars minimum. Many times, tens of thousands of dollars. Sometimes even hundreds of thousands. The easiest way to get your company disqualified is to tell a prospective business financing company that you only put $1,000 into your business. If you are not committed, why should they? I also wrote about this on this post.

I ask this because I want to know if they (figuratively) put their money where their mouth is!

Although my method is not very scientific it works very well, at least for me. It's a good predictor of who to focus on. I suspect that on some level, many business finance professionals use these or similar questions themselves.

In summary, small business owners fail when they have:

1. Unrealistic expectations
2. Little experience
3. Little or no income
4. No/Minimal investment

Sounds obvious, doesn't it? That's because it is.

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Looking for information on purchase order financing? Read the purchase order finance blog

Is the Recession Over?

2009-09-22T12:56:00.003-04:00

There has been a lot of buzz that finally the recession is over and a recovery may be on its way. I even commented about it on the invoice factoring blog. Overall, we are also noticing a recovery in our clients.

Many purchase order financing clients are suppliers to the retail industry. I believe that if you could look at the book of business of your average purchase order finance company, you'd get a leading indicator of how the retail sector will perform these holidays. Don't look at me for answers though, I can't tell :-)

On a related note, I also think that factoring activity can be a leading indicator to both the recovery and future retail activity. Personally, I tend to look at both invoice factoring and purchase order financing as possible indicators of things to come.

Either way, the news on the retail front lately has been mildly positive and showing improvement. What do you think will happen this holiday season?

p.s. don't let the image I chose fool you into thinking it's a hidden clue. It's not. I just like the image.

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Looking for information on purchase order financing? Read the purchase order finance blog

A Tool for Small Businesses

2009-09-18T12:37:00.003-04:00

In previous posts, both in this blog and in my other blog (invoice factoring blog) I've talked about the mistakes that small business owners make when they are looking for business financing - specifically factoring and purchase order financing. Today I am going to talk about PO financing true potential.

Most businesses -at least the successful ones - are limited by the capital or funding they have. Those that have it grow. Those that don't, stagnate or perish. Purchase order funding provides you a way out of that problem, provided your business meets certain criteria:

It must resell products (i.e. be a dealer)
It's must buy products for re-sale from another business or alternatively, have a 3rd party facility provide all manufacturing services.
It must have high profit margins (say > 20%)
Lastly, it must have credit worthy clients

The last point is crucial. If you are selling goods to creditworthy clients, such as large companies, po financing may be able to provide the funding you need. Basically, po financing covers the costs of paying your suppliers and enables you to handle large purchase orders.

Purchase order financing is also very different from conventional products such as business loans. For starters:

It's less cumbersome to obtain than a conventional business loan
There are no month-long-waits. Most approvals/denials are done quickly
The line limit is based on the size of the po, the credit quality of your clients and the quality of your suppliers

Although not a panacea, purchase order financing can provide the needed financing for many small companies.

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Looking for information on purchase order financing? Read the purchase order finance blog

Odd Trend in Government Contractors

2009-09-17T14:40:00.005-04:00

Lately, we have been getting a lot of calls from prospects that are looking to finance their government contracts using purchase order financing. Many of these are start ups. As I have said before, a big chunk of our business involves financing start ups. So far so good.

What is odd is that many of these company owners seem to have unrealistic funding expectations. For example, many of these owners:

1. Can't put any money into the business (above say, $500)

2. Have never sold anything to the government before

3. Don't have much business experience

I am all for entrepreneurship and like to think that we are a good business financing source for young companies. At the same time, most funding companies like to work with business owners that have realistic expectations.

Let me ask a reader question - would you be willing to fund a company that has no experience and no capital? Would you?

So - what can a very small business owner who is low in cash but wants to work in this field do? Well, if you'd like to increase your chances of getting funding, consider the following:

1. Learn how to sell to the government. Read read and read some more!

2. Get a couple of successful transactions under your belt - even if they are small. This is critical.

3. Save some money and invest it in your business. Show the funding company that you believe in your own business by putting your own money. Have no money to invest? Well, start cutting some of your discretionary expenses and start saving. No one said business ownership was easy :-)

4. Be realistic. If you have done two $5000 transactions with your new business, don't call your funding company and tell them you will be doing $1000,000 in 6 months. Sorry, it's not believable.

And remember,plan, plan and plan some more. Weather you are looking for po funding or a business loan (or something in between), funding companies prefer to work with business owners that plan ahead.

One last thing - don't get discouraged if you can't get po funding the first time. It can happen. You may also want to consider getting factoring as a stop gap. Qualifying for factoring is usually easier than qualifying for po funding.

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Looking for information on purchase order financing? Read the purchase order finance blog

Slow Pays Are Here

2009-08-31T11:16:00.003-04:00

I recently wrote an article about how bigger companies were collecting quickly but paying invoices slowly. You can read the post here. The article came from the Wall Street Journal and basically details how bigger companies are improving their cash position by using this technique.

The fact that many companies are paying at a snail's pace has both increased the demand for invoice factoring and purchase order financing services. However, there is a catch. Many companies that are paying slowly have also inadvertently affected their business credit (if they now pay beyond terms).

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Looking for information on purchase order financing? Read the purchase order finance blog

How Are Purchase Order Financing Companies Funded?

2009-08-26T15:58:00.002-04:00

Most purchase order financing companies are funded by one, some or all of the following:

1. Bank line of credit
2. Hedge funds
3. Owners own capital
4. Investors
5. Larger factoring companies (who invest in a smaller factoring company)

So, like most financial businesses, they reinvest these funds in financing transactions and then make the difference between what they charge and the cost of funds (less expenses, write-offs etc).

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Looking for information on purchase order financing? Read the purchase order finance blog

One Supplier vs. Many?

2009-08-17T10:49:00.004-04:00

Most purchase order financing providers usually finance orders where only one supplier will be needed to fulfill it. And they specifically try to avoid financing orders where there are:

1. Multiple suppliers -or worse -
2. Multiple suppliers that depend on each other (e.g. one produces product, another one the bottles for it and a third one the labels for the bottles)

Why do we avoid these transactions? Well, because of the risk. Specifically, the risk that one of the multiple suppliers will fail, preventing the complete order from being delivered and paid for.

Here is an example, let's say that you produce beverages and have an order for $100,000. You have the following suppliers that need to be paid:

1. Bottle company
2. Label supplier
3. Beverage producer and bottler

What happens if the bottle company delivers bad bottles? or if the label company does a shoddy job? We are still stuck paying the other suppliers but the order will likely fail. The customer won't take delivery and they won't pay. This is a risk we aim to avoid.

If you have multiple suppliers (for a single order) you way need to consider other business financing options, such as a business loan or invoice factoring.

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Looking for information on purchase order financing? Read the factoring articles or the purchase order finance blog

PO Funding and the Holiday Season

2009-08-17T10:24:00.002-04:00

There are areas of the purchase order finance industry that are related to the retail industry - and thus the holiday season. If you do the math, most retailers will start placing their holiday orders in the summer (or late summer) so that their shelves have goods available for the Xmas holiday.

Of course, few invoice factoring and purchase order financing companies will share this information - but I'd be great if we could pool our data into a common index that showed economic health.

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Looking for information on purchase order financing? Read the purchase order finance blog

Turnaround Situations

2009-07-20T13:53:00.001-04:00

Given the current state of the economy (although it's improving!), I get many calls from businesses that need purchase order financing to fund their turnaround. Is po financing the right solution for a turnaround? It can be, but you should know that it will not be as flexible as factoring. Two things to bear in mind:

1. Most po funders can work with companies that are showing losses, if those losses are tenporary and if there is a solid plan in place to turn around the company.

2. Most po funders cannot work with companies that have negative equity. Basically, when liabilities are greater than assets.

This can sometimes be a bitter pill to swallow for business owners, especially in these hard times. But unfortunately, the risks associated with negative equity are too great. Also, many financing companies (who themselves get financing elsewhere) may have restrictive covenants that prevent them from funding companies with negative equity. So remember that their hands may be tied as well.

So, po financing can be useful in turnaround scenarios, but not but it's not the right business financing solution for all cases.

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Looking for information on purchase order financing? Read the purchase order finance blog

CIT Group news

2009-07-11T16:12:00.002-04:00

Here is an article on the journal about CIT group. This is actually a concern for the industry as CIT is a major player in trade financing - and a major provider of factoring and invoice factoring. Although I suspect that CIT is not "too big to fail", it's failure could have strong repercussions in the small business community in the USA. I know that they finance a number of franchises and small businesses.

This one should be on everyone's radar. I certainly wish them luck.

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Looking for information on purchase order financing? Read factoring articles or the purchase order finance blog

Purchase Order Financing and Business Loans

2009-07-10T11:26:00.004-04:00

As I mentioned in a recent post we have been getting a lot of clients that used to have (or currently have) a business financing package from their bank. Most companies that get a business loan, also get a lien encumbering all assets.

It will be close to impossible for you to get any other type of financing (whether it's factoring or purchase order funding) unless one of two things happen:

1. You pay off the loan and the bank releases the lien. Sometimes this payoff can come from your new facility.

2. The bank agrees to subordinate their position

Option #2 basically means that the bank gives first priority on certain (or all) assets to the new financing company. Businesses that have existing bank financing and want to start using purchase order funding to grow their operations will, more often than not, need to address this.

Few people know about this, but it derails many opportunities that come through my desk. If you have existing financing and you are looking for a new company, you should review your current loan/financing documents and make sure you understand them. And, as with all legal matters, you should consult an attorney or a financial professional since the writer of this blog (that's me!) disclaims all liability and does not offer financial advice :-)

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Looking for information on purchase order financing? Read factoring financing articles or the purchase order finance blog

Financing Startups? Yes - But Be Sensible!

2009-06-24T10:21:00.005-04:00

We are quite happy to offer purchase order financing to startups. Because of that, we get many calls from budding entrepreneurs looking for business financing. Many are disappointed when we decline the opportunity to participate in the business. In part, we decline many of them because they have unrealistic expectations. Here are some examples of things we see that will garner a DECLINE:

1. Entrepreneurs that don't put any money themselves

This one is a classic. We get a balance sheet that shows that the owner put $1,000 in their business with NO other assets or sales and expect us to fund the rest. I think there is a myth, in part propagated by some famous entrepreneurs that did start with $1000, that this is enough. Let me ask, why would *WE* risk capital if the owner is only risking $1,000? The short answer is we wouldn't - and don't.

2. No Experience

It is common for people to try and start a business for which they have no experience. As a matter of fact - I did so myself. But it is unrealistic to ask others to finance your startup until you have had some successful transactions under your belt. You should expect to self-finance your business until you learn the ropes, just like I did :-)

3. Unrealistic Goals

"Marco, this is a new concept and we'll be a $12,000,000 by the end of the year. We just need the Money. And, oh by the way, I only put $1000 in the business (read #1)." Sorry, the odds are that you wont be a going concern by the end of the year. Well thought out sales forecasts are a must. And also - tone down sales expectations - otherwise you could set your self up for failure if you don't meet them. Remember that running a startup is challenging.

4. Thinking their business has no risk (riiiight!)

This is a classic. I get a call from a startup entrepreneur who tells me their transaction has no risk. As a rule of thumb, I always turn these down. No exceptions. Even if everything else appears well thought out. All transactions have risk. Period. Otherwise, there would be an opportunity for Arbitrage. And if an entrepreneur cannot see that -then we consider them dangerous. Investors consider one of the few risk free assets to be US Government securities (e.g. TBILLS).

So weather you are looking for a business loan, factoring or any type of funding, keep these points in mind.

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Looking for information on purchase order financing? Read the purchase order finance blog or look for business loan financing in wisconsin.

The 5 C's of Lending

2009-06-11T09:46:00.002-04:00

Although this blog is not about lending, let me borrow a page from their playbook. Lenders always talk about the 5 C's of lending. They are:

Capacity

Credit

Collateral

Conditions

Character

Today we will talk about Character. Now that the economy has been in shambles for a while, many companies are starting to become desperate for any kind of business financing. It's a survival thing, and it's understandable. But credit crisis or not - the 5 C's still rule. Now, more than ever. Character - and this refers to the owners and managers - is critical. What is character?

Well, it varies by firm. In my little world of purchase order financing, for us, Character involves having prospects that either:

1. Have a complete clean slate. That is, they have good/reasonable credit and not blemishes such as bankruptcies/etc.

-or-

2. Have a blemished slate - that is explainable and reasonable. And also - be upfront about it. Don't wait for our underwriting team to find it.

You read #2 right. Don't hide it. Rather bring it upfront early and have sensible explanations for what happened. Even if you made a "dumb mistake", be upfront. That may not guarantee approval, but will almost certainly trigger respect. And respect helps you get approved.

Let me tell you a story about a prospect that I had years ago. They ran a successful start up that sold products to the government. They had not been able to get a business loan so they approached us for some financing. In their application they marked that none of the owners had ever been involved in a bankruptcy.

Our search indicated that they had a prior Chapter 7. When confronted, the owner explained that there had been a medical problem - coupled with a nasty divorce - that led to the bankruptcy. If they had explained this situation upfront they would have been approved. But they hid it and lied on their application. Unfortunately, we declined them.

This may sound harsh. But think about it this way. Problems will happen during a financing relationship. It's just how it is. We understand it. But we also only want to work with people that will own up to them and face them, not with people that will hide them until the problems blow up.

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Looking for information on purchase order financing? Read the purchase order finance blog to learn about business loan financing in wyoming

Credit Enhancements as a Substitute for Purchase Order Financing

2009-05-20T11:31:00.004-04:00

Recently I have been getting a number of call from companies that are looking for purchase order financing. After a short conversation, we invariably find that we can usually help this client by combining conventional invoice factoring with a credit enhancement.

Lets first look at the problem they are trying to solve. Most of this prospects have suppliers that are unwilling to extend them additional trade credit. If their suppliers were willing to extend their already existing credit they would be fine.

Well, this can be done using factoring and including an agreement where the factoring company direct advances to the supplier (to satisfy moneys owed) first, and then send the reminder to the client. Usually, this does the trick.

The advantages:

1. It helps you build your commercial credit
2. It's usually cheaper than purchase order funding
3. It's less complicated than po funding

Now, not every factoring company offers this. Also, I have over simplified a few points for brevity. But if you are looking for purchase order financing, you'd be wise to compare it against conventional credit enhancements.

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Looking for information on purchase order financing? Read the purchase order finance blog

Retail Sales Still Sliding

2009-05-13T10:48:00.006-04:00

As this report from the WSJ shows, retail sales are still sliding. Given that we are now in May, this is problematic as I think that this coming Christmas season may be in jeopardy on two possible fronts:

1. Things recover but stores run out of certain items due to cautious ordering
2. Things don't recover and retailers get hammered, again.

There are three sides to purchase order financing. There are:

1. Commercial sales
2. Retail sales
3. Government sales

Most people are seeing a decline in #1 and #2, but an increase in #3. This is certainly an interesting time to be in this industry. The fact that many companies still cannot get conventional business financing at their local institution are making things easier since there is still deal-flow.

But the fact remains that the retail industry, especially large chains, are a major engine of the purchase order financing industry. Until thing improve in that market, things will be a little bit funky for purchase order financiers.

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Please keep us in mind if you are looking for factoring an purchase order financing in Alabama. We offer factoring in Alabama.

Things are bottoming out

2009-05-08T11:54:00.002-04:00

Here is a very interesting article on the Financial Times that talks about how things are stabilizing. In my humble opinion is does not mean that things are going up - just stabilizing. With stability you get some predictability. Predictability is the platform for possible future growth. So this is good.

Many now that the purchase order financing market has taken a bit of a hit since there is heavy involvement in the retail sector. However, other area of it are growing to compensate. And given the current lack of availability of business financing, it remains a viable alternative for companies that cannot get a business loan.

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Looking for information on purchase order financing? Read the purchase order finance blog

Why PO Financing works best with High Margin Transactions

2009-05-08T11:38:00.002-04:00

I commonly get calls from companies that are excited about the prospect of using purchase order financing, only to find out that they don't qualify because their gross margins are too low. So why do many purchase order finance companies usually require high margins (20% to 30%)?

There are a couple of reasons:

1. Finance companies consider purchase order financing transactions to be risky since many things can go wrong. Having a high margin enables some things to go wrong, while providing a sufficiently large cushion to soften the impact.

2. Purchase order financing is not cheap. Especially if you compare it against other forms of business financing such as a business loan. Requiring high margins ensures that the owners have a sufficiently large profit margin to make the transaction worth their while

Can finance companies work with orders that have smaller margins. Of course. They can do so on exceptional situations if the transactions makes sense. But be aware that the risk will also be higher.

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Looking for information on purchase order financing? Read the purchase order finance blog

Venture Capital in Problems?

2009-04-22T11:13:00.005-04:00

As you can see from this article on the WSJ, the number of venture capital investments has dropped significantly. This is a statistic that concerns me because VC's are an important source of business financing for the economy. Whereas a business loan is usually targeted to an existing business (or an owner with lots of assets), VC's target companies that could grow and go public.

I am actually surprised that VC investments since I always thought that a good time to invest is in a downturn when things are cheap. Let's hope this pick up. At least I am seeing a pickup in the factoring market.

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Looking for information on purchase order financing? Read the purchase order finance blog

Good news from the Federal Reserve

2009-04-19T07:33:00.004-04:00

I was pleased to read this morning that fed officials think that worst of the recession is over. At last! After a year of seeing lots of negativity in the press, finally officials (and businesses) show some cautious optimism. One of the problems that exacerbated the crisis has been the exaggerated pessimism. So called economic pundits that appear on TV trying to deliver shock value through bad news. I have always thought that their effect was enourmous - and becauise of that they should act responsibly. I'd like to note how there were not many pundits out there predicting that the crisis would happen - before it happened. This tells oyu a little bit about their ability to predict things in general.

There are two things to remember:

1. Recessions happen. It is what it is.

2. So far, the USA has ultimately always recovered.

I think that we will see thinkgs improve once there is a uptick in business financing activity. An increase in the business credit flows (read: business loan) is what needs to happen before we see any major improvements.

But lets bask in these good news.

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Looking for information on purchase order financing? Read the purchase order finance blog

NPR News

2009-04-08T09:43:00.002-04:00

NPR had a news piece yesterday about the "new normal". The new normal, was really different. They suspected that Americans would save more and consume less. It was an interesting perception - they thought that the recession had fundamentally altered American shopping habits.

Most companies that use purchase order financing tend to sell goods to retailers. If retail sales are going to stay down, that bodes badly for them.

I have to admit I have my doubts about the new normal. I am not against it, by the way. I just think that retail sales will pick up once things improve, and new retailers will emerge to replace those lost to bankruptcy.

In the meantime, things keep on moving though. It's still tough to get business financing from a bank, thanks to the drought on business loans, so alternative options remain at the forefront.

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Looking for information on purchase order financing? Read the purchase order finance blog

Foreign Suppliers - Why a Letter of Credit is a Good Idea

2009-04-07T10:20:00.007-04:00

I recently read an article in Business Week that talked about how factories in China were closing, and just how messy those closings were. Many suppliers were left unpaid. Clients were left without product.....

This brings me to a point of doing business in a foreign land. Most of my purchase order financing have foreign suppliers. These suppliers usually demand payment in cash - however we always insist on paying with a Letter of Credit. Why? Well, it's not because we are unreasonable. It's because we want to engage in a protected transaction (our client is protected) in which the supplier is guaranteed a payment - only if they deliver: in time and in the right quality/quantity. It protects the supplier (they get paid), and the client (they get the product).

By the way - and this is just a personal thought - I am always suspicious of a supplier who is unwilling to accept a letter of credit for a large order. In my opinion, it's a red flag and it can mean that they are in trouble and they need money themselves.

Now imagine the worst case scenario - you send an advance - say 50%, and then your supplier dissapears. Now what? Travel to abroad and try to collect? Not likely. That is where a Letter of Credit protects you - and why we insist that our purchase order financing clients use them.

Even with things as complex as they are - temember that purchase order financing is a very flexible form of business financing that is still easier to get than a business loan.

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Looking for information on purchase order financing? Read the purchase order finance blog

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Presenting yourself and your business